THE CRUDE AWAKENING
by John Myers
for the Daily Reckoning
"The days of cheap energy are gone."— Michael Hershey, president, Landis Associates LLC
The only shock about the surging price of oil these days is that Wall Street is shocked by it. If professional investors didn't see this one coming, they must have either been locked up in an Iraqi prison or in a coma. We certainly saw it coming.
For as much as we have talked about the impact of growing demand for petroleum from China, India and a cavalcade of SUV drivers in North America, the biggest reason for the bull market in oil is a shortage of supplies. From bottlenecks caused by aging refineries and a supertanker shortage to depleted production from non-OPEC producers, the price of crude is being pushed higher because of one simple fact: There isn't enough of it.
One of the biggest bottlenecks — one that can't be overcome quickly or easily — in the industry, is the lack of refining capacity in Canada and the United States. The U.S. Energy Department reports that refining capacity in the United States has grown by just 2.4% since 1977, while demand for gasoline has risen 27% during the same period.
And the cruel fact is that no major new oil refineries have been built in the United States or Canada since the early 1980s, and many of the ones that used to exist have been shut down. That's left the continent's existing refineries stretched to capacity, just as North American gasoline markets are heading into the heavy demand summer driving season. According to one estimate, U.S. refineries are running at about 97% capacity.
In fact, many of the refineries that disappeared in the past 20 years were closed because it would have been too expensive to upgrade them to meet new environmental rules. It's not a coincidence that no new refineries have been built since the U.S. Environmental Protection Agency brought in its Clean Air regulations, which placed limits on refinery emissions. How expensive is expensive? Just meeting the various local, state and federal environmental and planning requirements for a new refinery could cost as much as $100 million, according to some estimates — if a site could even be found. And if the permits were acquired, the U.S. Senate Committee on Environment and Public Works estimates the cost to build a new refinery at a whopping $2.5 billion. And, oh yes, it could take seven years to complete.
If you want to understand the world's oil supply problem, simply look at what happens to a single oil field. Whether you are talking about Prudhoe Bay in Alaska or Leduc in Alberta, the life cycle of an oil field is the same. It takes several years after an oil basin is discovered to achieve maximum production as the field continues to be developed with additional step-out wells.
As a good rule of thumb, after half the recoverable reserves have been pumped from a field, there is a rapid decline in the field's oil reservoir. It becomes less and less economical to pump oil from the field, until a break-even point is reached — a point where the expense of operating the oil field equals the revenues produced by the field.
The physics that apply to a single field also apply to a region or an entire country. Consider the continental United States. The rate at which new oil was discovered hit its peak in 1957. By the early 1960s, the nation's total proven reserves reached their all-time high. Less than a decade later, U.S. production peaked. Production was relatively stable until the mid-1980s and then began to fall precipitously.
Year after year the Americans have made up the shortfall in oil production by importing foreign crude. But what happens when the world's output begins to fall? The price impact of dwindling supplies will meet surging demand — a formula for incredible profits in oil and gas stocks.
What is so bullish for oil is that, while world discovery rates peaked in the 1960s, global oil reserves have not increased since 1990. In fact, over the past four decades, exploration efforts have yielded a diminishing return.
In the 1960s the industry discovered 375 billion barrels... in the '80s, 150 billion barrels were discovered. Even fewer barrels were discovered during the 1990s.
Perhaps this year, and certainly by no later than 2005, world production will hit its apex. That means that over the second half of this decade world oil output will begin to decline... just as global oil demand is surging.
And each year, the world pumps and burns 26 billion barrels of oil, this nonrenewable resource. That means that every four years, more than 100 billion barrels of oil — five times the total reserves of the United States — are consumed.
Of course, not all oil-producing nations will experience a reduction in output at the same time. As I mentioned, U.S. production began to fall in the 1970s. Mexico and North Sea productions are now in decline, and few expect a major discovery in those regions.
The only other major non-OPEC oil region is Russia. But new oil discoveries in the former Soviet Union have been in decline since the late 1980s. The expectation of most oil executives is that we are on the verge of declining Russian oil production.
Oil production from non-OPEC countries has kept oil prices in check until just recently. But nowadays, oil supplies outside OPEC don't gush to the surface the way they once did. The really plum oil fields are in the Persian Gulf.
In 1973 — the eve of the first oil crisis — there were 15 giant oil fields in the world producing over 1 million barrels per day. They accounted for almost 30% of the world's daily supply. Moreover, their average age was only 23 years.
Today 13 of these 15 giant fields are still producing, though their average age is now 50 years. Only two of these original fields still produce over 1 million barrels of oil per day, and the 11 remaining fields each have an average production of around 200,000 to 300,000 barrels per day.
Today, only two fields in all non-OPEC countries produce over 1 million barrels per day. Another three produce about 500,000 barrels per day.
As production in these regions enters into decline, more power falls to OPEC, particularly Arab OPEC. Already countries around the Persian Gulf produce one-third of the world's crude oil and control two-thirds of the world's reserves... and make up the only major oil-producing region in the world that is not yet close to its oil reserve half-life.
Turning to our ally in the Middle East — Saudi Arabia — brings up a new question: Just how effective can Saudi Arabia be in easing the supply crunch?
Put aside for a moment the frightening terrorist activities in that country — like the recent killing of 22 people in Khobar. When you look at the issue of supply versus demand, you have to recognize that not even Saudi Arabia has the oil capacity to ease the world's supply problems.
Twenty-five years ago, Saudi Arabia stood ready to pump 14 million barrels per day. Currently, the Saudis say that, if necessary, they can raise oil output over time from 8.35 million barrels per day to 12 million barrels per day.
But a Calgary geologist, who has spent extensive time working in Saudi Arabia over a career that has spanned 25 years, told us that while the Saudis could raise production to 12 million barrels per day for a time, they certainly couldn't keep that output going for long. Oil simply doesn't flow the way it did 20 years ago. Not even for the Saudis.
All this just tells us that oil prices aren't ready to stabilize, let alone retreat... even though much of the world doesn't believe prices will stay at these levels. The conventional thinking is that oil prices will fall, but I'm certain they'll go just the opposite way... higher!
Regards,
John Myers
for The Daily Reckoning
Friday, June 25, 2004
Thursday, June 24, 2004
June 24, 2004 Philippine Stock Market Review
After a vivacious start, the Phisix succumbed to a late day selling which could be characterized as profit taking on a “sell on news”.
Recall that since the onset of the election campaign period in February the Phisix have climbed by as much as 8.04% in April 28th which probably means that the market has factored in a peaceful conclusion to the national elections with a victory by the incumbent administration.
Today’s early morning proclamation for PGMA and VP De Castro basically put to fact to these anticipations hence, the mixed performance among heavyweights leading to the marginal rise (.02%) of the benchmark Phisix.
Of the eight index heavyweights that comprise more than 75% of the Phisix, three issues advanced, four issues declined while 2 remained unchanged. Key telecom issues PLDT (+.89%) and Globe Telecoms (+.58%) together with Ayala Land (+1.81%) cushioned the declines of Ayala Corp. (-1.75%), San Miguel B (-.68%), SM Primeholdings (-1.66%) and Metrobank (-1.78%). Meanwhile, San Miguel local shares and Bank of the Philippine Islands closed unchanged.
Incidentally, PLDT has surpassed or overtaken San Miguel Corporation as the largest listed company based on market capitalization on the Phisix. As of today’s close PLDT constitutes 17.48% of the 30-company benchmark, with the combined San Miguel shares accounting for 16.52% and the third spot going to the telecom issue, Globe Telecoms which took up 11.04%.
Despite the rather mixed performance of the index as reflected by the major index heavyweights, overall market breadth showed underlying bullishness with advancing issues dominating declining issues by almost 2 to 1, i.e. 42 to 24.
Moreover, the number of traded issues have reached past 100 (exactly 119 today) for the fifth consecutive trading day which means investors optimism have prompted for a broader degree of accumulations.
Furthermore, foreign money, which made up half of today’s turnover, remained on a bullish note injecting some P 47.680 million worth of equity asset acquisitions.
If these underlying bullishness should prevail in addition to the accelerating upside momentum, crossing the April 28th threshold of the 1,610 to 1,620 level could be sooner than expected.
Benson Te
Recall that since the onset of the election campaign period in February the Phisix have climbed by as much as 8.04% in April 28th which probably means that the market has factored in a peaceful conclusion to the national elections with a victory by the incumbent administration.
Today’s early morning proclamation for PGMA and VP De Castro basically put to fact to these anticipations hence, the mixed performance among heavyweights leading to the marginal rise (.02%) of the benchmark Phisix.
Of the eight index heavyweights that comprise more than 75% of the Phisix, three issues advanced, four issues declined while 2 remained unchanged. Key telecom issues PLDT (+.89%) and Globe Telecoms (+.58%) together with Ayala Land (+1.81%) cushioned the declines of Ayala Corp. (-1.75%), San Miguel B (-.68%), SM Primeholdings (-1.66%) and Metrobank (-1.78%). Meanwhile, San Miguel local shares and Bank of the Philippine Islands closed unchanged.
Incidentally, PLDT has surpassed or overtaken San Miguel Corporation as the largest listed company based on market capitalization on the Phisix. As of today’s close PLDT constitutes 17.48% of the 30-company benchmark, with the combined San Miguel shares accounting for 16.52% and the third spot going to the telecom issue, Globe Telecoms which took up 11.04%.
Despite the rather mixed performance of the index as reflected by the major index heavyweights, overall market breadth showed underlying bullishness with advancing issues dominating declining issues by almost 2 to 1, i.e. 42 to 24.
Moreover, the number of traded issues have reached past 100 (exactly 119 today) for the fifth consecutive trading day which means investors optimism have prompted for a broader degree of accumulations.
Furthermore, foreign money, which made up half of today’s turnover, remained on a bullish note injecting some P 47.680 million worth of equity asset acquisitions.
If these underlying bullishness should prevail in addition to the accelerating upside momentum, crossing the April 28th threshold of the 1,610 to 1,620 level could be sooner than expected.
Benson Te
Prof. Sennholz: Democracy Does Not Beget Prosperity
Democracy Does Not Beget Prosperity
A recent report by the World Commission on the Social Dimension of Globalization, sponsored by the International Labour Organization, is long on pious advice and short on economic reasoning. It lists l6 developing countries, with 45 percent of the world's population, where the gross domestic product is rising by more than 3 percent a year. Among them are the world's giants, China and India. But in 23 countries, with 5 percent of the world's population, GDP per head is falling. In another 14 countries, with just 8 percent of the world's population, incomes per head are rising by less than 1 percent a year. In short, the age of globalization which has brought significant economic advances to many countries is not reaching 37 countries with some 750 million inhabitants. Lingering in dearth and want, many millions continue to struggle for food and shelter.
The report admonishes poor countries to pursue social and economic policies that characterize all Western democracies. It urges prompt adoption of a democratic form of government, of national independence and sovereignty, and high labor standards enacted and enforced by government. Unfortunately, the advice is apt to be as unrealistic as is its explanation of high standards of living in more productive countries.
Democratic institutions surely provide a broad basis for popular government and give people the noble notion and pride that the country belongs to them. Whenever they grow weary of their government, they can exercise their right to change it. Yet democratization is not a necessary condition for economic development. The most startling economic progress, over the past two decades, has been in China which labors under an authoritarian regime. And many new democracies, from Azerbaijan to Kazakhstan, show little ability to progress economically. Even established democracies stagnate economically, with millions of workers condemned to unemployment and declining standards of living when guided by economic ideologies hostile to economic productivity. Government by the people may be as injurious to economic well-being as any other form of government.
Similarly, national independence and self-government are no guarantee of economic progress. The world's poorest countries, such as the Democratic Republic of the Congo, Burundi, and Ethiopia, are as independent as the wealthiest countries, but are poorly governed. In fact, the world's poorest countries may even be poorer today than they were in ages past when they labored under foreign rule. In contrast, many countries that until the twentieth century lacked complete independence and self-government, such as Australia (1901) and New Zealand (1947), expanded rapidly as colonies of the British Empire. They enjoyed the ideological and legal preconditions of economic development, that is, safety of private property, entrepreneurial freedom, and the spirit of enterprise. The poverty of many countries, which moves wealthy countries to pity and foreign aid without end, obviously lacks these preconditions; the suffering of the people is likely to continue as long as the sovereignty of their disfunctioning governments remain unchallenged.
It cannot be surprising that the Commission report also acclaims stringent labor legislation while it condemns the omnipresence of informal, illegal labor markets. It obviously ignores the harmful consequences of labor legislation that creates huge surpluses of unskilled labor and thereby gives rise to informal labor markets, commonly called "black markets." Legal labor markets tend to be characterized by standards and benefit costs that exceed actual employee productivity and, therefore, condemn millions of workers to chronic unemployment. While some victims readily content themselves with lives on unemployment benefits and other forms of public charity, many prefer to descend to the underground economy where services are rendered at true market rates and contracts are concluded by word of mouth and a handshake.
Stringent labor legislation, such as that in old welfare states, invariably gives rise to dualistic national economies with a highly-paid legal sector and a huge illegal market sector. The former, stunted by legislation and regulation, generates the surplus of labor for the large underground economy which tends to grow with every new law and regulation that grant costly benefits to labor. In the old welfare states of Europe, where the official rate of unemployment rarely falls below ten percent of the official work force, the informal underground sector may exceed one-third to one-half of total economic production. Without the underground economy, many people would be immeasurably poorer.
The chronic conflict between the legal economy and the unregulated market – which is immune to regulation – begets corruption and decadence. Where the authorities are determined to enforce the myriad of labor regulations they turn their countries into "police states" that prosecute feverishly and meet out fines and imprisonment for petty infractions. To offer unregulated employment to unemployed workers is a grievous employer offense that is punished with heavy fines. They are rather effectual in maintaining high unemployment rates.
The Commission's report clearly reflects its sponsorship by the International Labour Organization. It spurns market economics and sows class conflict. Democracy, sovereignty, and labor regulation give no assurance of economic development; only private property in the means of production and the unhampered market order will encourage economic development and ever-rising standards of living.
Hans F. Sennholz
A recent report by the World Commission on the Social Dimension of Globalization, sponsored by the International Labour Organization, is long on pious advice and short on economic reasoning. It lists l6 developing countries, with 45 percent of the world's population, where the gross domestic product is rising by more than 3 percent a year. Among them are the world's giants, China and India. But in 23 countries, with 5 percent of the world's population, GDP per head is falling. In another 14 countries, with just 8 percent of the world's population, incomes per head are rising by less than 1 percent a year. In short, the age of globalization which has brought significant economic advances to many countries is not reaching 37 countries with some 750 million inhabitants. Lingering in dearth and want, many millions continue to struggle for food and shelter.
The report admonishes poor countries to pursue social and economic policies that characterize all Western democracies. It urges prompt adoption of a democratic form of government, of national independence and sovereignty, and high labor standards enacted and enforced by government. Unfortunately, the advice is apt to be as unrealistic as is its explanation of high standards of living in more productive countries.
Democratic institutions surely provide a broad basis for popular government and give people the noble notion and pride that the country belongs to them. Whenever they grow weary of their government, they can exercise their right to change it. Yet democratization is not a necessary condition for economic development. The most startling economic progress, over the past two decades, has been in China which labors under an authoritarian regime. And many new democracies, from Azerbaijan to Kazakhstan, show little ability to progress economically. Even established democracies stagnate economically, with millions of workers condemned to unemployment and declining standards of living when guided by economic ideologies hostile to economic productivity. Government by the people may be as injurious to economic well-being as any other form of government.
Similarly, national independence and self-government are no guarantee of economic progress. The world's poorest countries, such as the Democratic Republic of the Congo, Burundi, and Ethiopia, are as independent as the wealthiest countries, but are poorly governed. In fact, the world's poorest countries may even be poorer today than they were in ages past when they labored under foreign rule. In contrast, many countries that until the twentieth century lacked complete independence and self-government, such as Australia (1901) and New Zealand (1947), expanded rapidly as colonies of the British Empire. They enjoyed the ideological and legal preconditions of economic development, that is, safety of private property, entrepreneurial freedom, and the spirit of enterprise. The poverty of many countries, which moves wealthy countries to pity and foreign aid without end, obviously lacks these preconditions; the suffering of the people is likely to continue as long as the sovereignty of their disfunctioning governments remain unchallenged.
It cannot be surprising that the Commission report also acclaims stringent labor legislation while it condemns the omnipresence of informal, illegal labor markets. It obviously ignores the harmful consequences of labor legislation that creates huge surpluses of unskilled labor and thereby gives rise to informal labor markets, commonly called "black markets." Legal labor markets tend to be characterized by standards and benefit costs that exceed actual employee productivity and, therefore, condemn millions of workers to chronic unemployment. While some victims readily content themselves with lives on unemployment benefits and other forms of public charity, many prefer to descend to the underground economy where services are rendered at true market rates and contracts are concluded by word of mouth and a handshake.
Stringent labor legislation, such as that in old welfare states, invariably gives rise to dualistic national economies with a highly-paid legal sector and a huge illegal market sector. The former, stunted by legislation and regulation, generates the surplus of labor for the large underground economy which tends to grow with every new law and regulation that grant costly benefits to labor. In the old welfare states of Europe, where the official rate of unemployment rarely falls below ten percent of the official work force, the informal underground sector may exceed one-third to one-half of total economic production. Without the underground economy, many people would be immeasurably poorer.
The chronic conflict between the legal economy and the unregulated market – which is immune to regulation – begets corruption and decadence. Where the authorities are determined to enforce the myriad of labor regulations they turn their countries into "police states" that prosecute feverishly and meet out fines and imprisonment for petty infractions. To offer unregulated employment to unemployed workers is a grievous employer offense that is punished with heavy fines. They are rather effectual in maintaining high unemployment rates.
The Commission's report clearly reflects its sponsorship by the International Labour Organization. It spurns market economics and sows class conflict. Democracy, sovereignty, and labor regulation give no assurance of economic development; only private property in the means of production and the unhampered market order will encourage economic development and ever-rising standards of living.
Hans F. Sennholz
The Economist: America's Trade Deficit
How to slay America's monster trade gap?
Jun 22nd 2004
From The Economist Global Agenda
America’s trade gap is growing again. Worse, it may be extremely hard to close it without causing much economic pain—and not just for Americans
LAST year, when the dollar resumed its steady decline after a brief spring rally, many observers felt vindicated and a little relieved. The world had grown too dependent on selling its goods to America. For its part, America was too dependent on flogging its assets to the rest of the world to finance its addiction to imported goods. To be sure, America’s willingness to spend more than it could strictly afford on other countries’ manufactures was welcome at a time when most of these countries’ economies were sluggish. But deficits of over 5% of GDP in America’s current account could not be sustained. Having carried the world economy through the first, crucial leg of recovery from the slowdown of 2001, some economists felt it was time for America to “hand over the baton” to the rest of the world and pause for breath.
But America is refusing to let go of the baton. It continues to import much more than it exports while investing more than it saves. According to figures released last Friday, its current-account deficit, having narrowed to 4.6% of GDP at the end of last year, has widened again in the first quarter of this year (see chart), to 5.1% of GDP.
Were we expecting too much from a fall in the dollar? In other countries, a swift depreciation of the exchange rate has worked wonders. A fall of 20%-plus, in real terms, in the Swedish krone after 1992, for example, turned a deficit of more than 3% of GDP into a surplus of about 4%. But Sweden is a relatively small economy. Providing it remains outside the euro, it can depreciate, gaining competitiveness against its neighbours, without beggaring them. The United States, on other hand, is such a crucial destination for the imports of so many countries that they may struggle to find alternative sources of demand.
A recent study* by economists at the OECD illustrates the difficulty. To narrow the deficit by two percentage points by the end of the decade, they reckon the greenback would have to lose about a quarter of its current value (as measured against the currencies of America’s major trading partners) by the end of this year. Since China and Malaysia peg their currencies to the dollar, and many other Asian countries track it closely, Japan and the euro area would bear the brunt of the dollar’s fall. They would not bear it easily. America is such an important export market for both that neither would cope easily with such a loss of competitiveness. The European Central Bank (ECB) has some scope to ease the blow by cutting interest rates but the Bank of Japan has already cut them as low as they can go. As a result, the strengthening yen would cut Japan’s output in 2009 by more than 2% and condemn the country to another six years of falling prices, the study reckons.
Earlier this month, at the summit of G8 heads of state in the American state of Georgia, France’s President Jacques Chirac worried out loud about the future implications of America’s spendthrift ways. The Europeans point the finger in particular at President George Bush’s government, which is projected to run a budget deficit of 4.7% of GDP this year. America’s outsized trade deficit, the Europeans argue, is the “twin” of this giant budget deficit. One cannot be dealt with, without the other.
But even as Europeans accuse the United States of throwing the world economy off balance, Americans accuse an arthritic Europe of holding the world economy back. Europe’s firms and workers are too cosseted, they argue, and as a result the continent’s economies are unable to pull their weight in the world economy. America is prepared to hand over the baton; but Europe must be ready to take it up.
Neither side of this debate is much willing to listen to the other. But what if they did? The OECD’s economists shed light on what would happen if each side took the advice of the other. Suppose, for example, that the governments of the euro area (and America’s other OECD trading partners) heeded Uncle Sam’s lectures and passed liberalising reforms that raised their trend rates of growth by 0.5%. This would do wonders for the euro area itself, but it would do little to narrow America’s trade deficit. The OECD economists reckon it would cut the deficit by just 0.2% of GDP by 2009. Despite what many Americans would like to believe, America’s trade gap is not simply an expression of its faster growth rate. The study found that America’s appetite for foreign goods is so much stronger than the rest of the world’s desire for American goods that even if the other rich countries raised their growth rates to match America’s, they would still sell more to America than it would sell to them.
Now suppose America gave in to the hectoring of Mr Chirac and others and put its finances back in order. The OECD’s authors imagine an administration prepared to raise taxes by 4.5% of GDP over the next six years while cutting spending by 1.5%. This would put the government into the black to the tune of 1.7% of GDP by 2009. But even such a massive fiscal turnaround, amounting to 6.6% of GDP, would knock only 2% of GDP off the trade deficit. Why? The OECD economists point out that private saving tends to fall when public saving increases. Between 1992 and 2000, for example, the Clinton administration turned a worrying budget deficit into a handsome surplus. But this only helped to unleash a private investment boom. Public saving was offset by private dissaving, ensuring that the country’s trade deficit continued to deteriorate. America’s budget and trade deficits may be twins but one, it seems, can survive without the other.
America’s deficit will not resolve itself without much pain, suggest the OECD economists. America must beggar its neighbours with a competitive devaluation of the dollar, or beggar itself with a massive fiscal contraction—or both. The consequences of letting America’s deficits continue are certainly worrisome, as Mr Chirac suggests. But he should be equally worried about the consequences of bringing them to an end.
Jun 22nd 2004
From The Economist Global Agenda
America’s trade gap is growing again. Worse, it may be extremely hard to close it without causing much economic pain—and not just for Americans
LAST year, when the dollar resumed its steady decline after a brief spring rally, many observers felt vindicated and a little relieved. The world had grown too dependent on selling its goods to America. For its part, America was too dependent on flogging its assets to the rest of the world to finance its addiction to imported goods. To be sure, America’s willingness to spend more than it could strictly afford on other countries’ manufactures was welcome at a time when most of these countries’ economies were sluggish. But deficits of over 5% of GDP in America’s current account could not be sustained. Having carried the world economy through the first, crucial leg of recovery from the slowdown of 2001, some economists felt it was time for America to “hand over the baton” to the rest of the world and pause for breath.
But America is refusing to let go of the baton. It continues to import much more than it exports while investing more than it saves. According to figures released last Friday, its current-account deficit, having narrowed to 4.6% of GDP at the end of last year, has widened again in the first quarter of this year (see chart), to 5.1% of GDP.
Were we expecting too much from a fall in the dollar? In other countries, a swift depreciation of the exchange rate has worked wonders. A fall of 20%-plus, in real terms, in the Swedish krone after 1992, for example, turned a deficit of more than 3% of GDP into a surplus of about 4%. But Sweden is a relatively small economy. Providing it remains outside the euro, it can depreciate, gaining competitiveness against its neighbours, without beggaring them. The United States, on other hand, is such a crucial destination for the imports of so many countries that they may struggle to find alternative sources of demand.
A recent study* by economists at the OECD illustrates the difficulty. To narrow the deficit by two percentage points by the end of the decade, they reckon the greenback would have to lose about a quarter of its current value (as measured against the currencies of America’s major trading partners) by the end of this year. Since China and Malaysia peg their currencies to the dollar, and many other Asian countries track it closely, Japan and the euro area would bear the brunt of the dollar’s fall. They would not bear it easily. America is such an important export market for both that neither would cope easily with such a loss of competitiveness. The European Central Bank (ECB) has some scope to ease the blow by cutting interest rates but the Bank of Japan has already cut them as low as they can go. As a result, the strengthening yen would cut Japan’s output in 2009 by more than 2% and condemn the country to another six years of falling prices, the study reckons.
Earlier this month, at the summit of G8 heads of state in the American state of Georgia, France’s President Jacques Chirac worried out loud about the future implications of America’s spendthrift ways. The Europeans point the finger in particular at President George Bush’s government, which is projected to run a budget deficit of 4.7% of GDP this year. America’s outsized trade deficit, the Europeans argue, is the “twin” of this giant budget deficit. One cannot be dealt with, without the other.
But even as Europeans accuse the United States of throwing the world economy off balance, Americans accuse an arthritic Europe of holding the world economy back. Europe’s firms and workers are too cosseted, they argue, and as a result the continent’s economies are unable to pull their weight in the world economy. America is prepared to hand over the baton; but Europe must be ready to take it up.
Neither side of this debate is much willing to listen to the other. But what if they did? The OECD’s economists shed light on what would happen if each side took the advice of the other. Suppose, for example, that the governments of the euro area (and America’s other OECD trading partners) heeded Uncle Sam’s lectures and passed liberalising reforms that raised their trend rates of growth by 0.5%. This would do wonders for the euro area itself, but it would do little to narrow America’s trade deficit. The OECD economists reckon it would cut the deficit by just 0.2% of GDP by 2009. Despite what many Americans would like to believe, America’s trade gap is not simply an expression of its faster growth rate. The study found that America’s appetite for foreign goods is so much stronger than the rest of the world’s desire for American goods that even if the other rich countries raised their growth rates to match America’s, they would still sell more to America than it would sell to them.
Now suppose America gave in to the hectoring of Mr Chirac and others and put its finances back in order. The OECD’s authors imagine an administration prepared to raise taxes by 4.5% of GDP over the next six years while cutting spending by 1.5%. This would put the government into the black to the tune of 1.7% of GDP by 2009. But even such a massive fiscal turnaround, amounting to 6.6% of GDP, would knock only 2% of GDP off the trade deficit. Why? The OECD economists point out that private saving tends to fall when public saving increases. Between 1992 and 2000, for example, the Clinton administration turned a worrying budget deficit into a handsome surplus. But this only helped to unleash a private investment boom. Public saving was offset by private dissaving, ensuring that the country’s trade deficit continued to deteriorate. America’s budget and trade deficits may be twins but one, it seems, can survive without the other.
America’s deficit will not resolve itself without much pain, suggest the OECD economists. America must beggar its neighbours with a competitive devaluation of the dollar, or beggar itself with a massive fiscal contraction—or both. The consequences of letting America’s deficits continue are certainly worrisome, as Mr Chirac suggests. But he should be equally worried about the consequences of bringing them to an end.
From Forbes Magazine: Dumbest Business Ideas
Dumbest Business Idea Of The Year
Tatiana Serafin, 07.05.04
Recycling entrepreneur Bernie C. Karl thought he had a cool way to lure tourists to remote Chena Hot Springs, 60 miles east of Fairbanks, Alaska. He would erect the world's first and only year-round hotel made of ice. Three other ice hotels, in Finland, Sweden and Canada, offer winter-only ice capades.
Karl's six-room Aurora Ice Hotel opened in December. Before spring was over, it was melting, along with his $20,000 investment. He somehow miscalculated the effect of 24-hour summer sun and 90-degree heat on the structure.
"I had a frozen asset. It's now a liquid asset," confesses Karl. He plans to rebuild, this time with thicker insulation.
Tatiana Serafin, 07.05.04
Recycling entrepreneur Bernie C. Karl thought he had a cool way to lure tourists to remote Chena Hot Springs, 60 miles east of Fairbanks, Alaska. He would erect the world's first and only year-round hotel made of ice. Three other ice hotels, in Finland, Sweden and Canada, offer winter-only ice capades.
Karl's six-room Aurora Ice Hotel opened in December. Before spring was over, it was melting, along with his $20,000 investment. He somehow miscalculated the effect of 24-hour summer sun and 90-degree heat on the structure.
"I had a frozen asset. It's now a liquid asset," confesses Karl. He plans to rebuild, this time with thicker insulation.
Wednesday, June 23, 2004
June 23, 2004 Philippine Stock Market Review
The Philippine benchmark index, the Phisix, recouped its post election losses and surged past the pre-May 10 levels. Foreign and local buying highlighted the session as advancers beat decliners 51 to 7, for its fifth consecutive positive market breadth with volume peso turnover expanding by P 666.410 million, the highest turnover since June 2nd. Net foreign buying accounted for P 42.768 million with the gist of the volume going to market leader PLDT(+2.29%), followed by bank heavyweights BPI (+3.61%) and MBT (+3.67%). The largest net foreign selling was accounted for by Meralco B (-1.66%) and SM Primeholdings (unchanged).
Only the mining index closed marginally lower among the other indices, taking a reprieve from its recent blistering run.
The Phisix, since its trough in May 19, has crept higher, probably due to positive expectations of peaceful conclusion to the recent national elections. Since May 19 the Phisix has grown 7.15% or 105 points. Chartwise, today’s gain of 30.65 points or 1.99% advance came at a significant break from its minor resistance level of 1,551 which may indicate that the momentum would mostly likely persist in the following days.
Only the mining index closed marginally lower among the other indices, taking a reprieve from its recent blistering run.
The Phisix, since its trough in May 19, has crept higher, probably due to positive expectations of peaceful conclusion to the recent national elections. Since May 19 the Phisix has grown 7.15% or 105 points. Chartwise, today’s gain of 30.65 points or 1.99% advance came at a significant break from its minor resistance level of 1,551 which may indicate that the momentum would mostly likely persist in the following days.
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