AskDong

I’ve been following the rise of oil, personally and professionally.  Oil prices affect me a lot more professionally than they do me personally. I don’t drive enough that the price of gas makes a substantial impact on my budget.  The fact is that rising oil prices have been good for me professionally.  Yes, I’m in the “evil” energy business.  I’m one those “speculators” driving up oil prices.

That’s not quite true. I don’t trade oil, but oil does have a substantial but indirect impact on the electricity market that I’m in. I also don’t believe that rising oil prices can be squarely blamed on financial speculators.  This is not to say that traders do not affect or profit from rising oil prices. However, it’s simplistic to think traders can make oil go from $60 to $120 and keep it there all on their own.

When an oil trader bids up oil by buying oil futures in the “shadow” financial economy, there is still a day of reckoning in the real economy. There’s no question that a speculator can raise the price of futures by merely buying.  Futures are contracts to buy or sell at a future date.  If I sold a one year future contract for $100/barrel, I’m obligated in one year to deliver oil for $100/barrel.  For instance let’s say I wanted to raise oil prices, I could buy future contracts settling a year out for $200 when oil is only trading $100 today in the spot market.  The spot market is the real world actual time economy.  The spot market and the futures market however do move together.  If someone is willing to buy oil for $200 in year, but oil is only $100 today, there’s a clear profit opportunity. I can buy oil today, store it for something less than $100/barrel, and sell the future contract.  Instant profit of a $100.  As a result spot markets and futures markets tend to track.

However for the same reason that speculators can affect the real world spot market, the real world spot market has impact of the shadow economy.  If speculators are willing to buy $200 oil in on year’s time, but inherent supply and demand implies oil should be $100 today and tomorrow, then there should be other traders who would gladly take the other side of that trade.  That trader knows he or she should be able to procure oil for less than $200/barrel.  Ultimately what really prevents speculators from affecting actual prices in the long term is that for every deal there is someone just as canny on the other side.

I’m not naive enough to believer that speculators have not had an impact on oil prices. They have, and were the movement in oil prices short lived, I would put more blame on speculators. However, high oil prices have been sustained and for that I believe there have been actual supply and demand changes. Speculators can only keep prices high only for so long as it takes ever more capital to keep prices high.  For example let’s say I’ve brought $200 oil last year, I’m out $200 already, and if I were want to keep prices high I need to come up with more capital to buy more without raising capital by selling.  It certainly wouldn’t be the first time that speculators have tried to corner the market.

Sadly enough, rising oil prices if they persist are being caused by long term change.  Rising demand in developing nations such as China and diminishing supplies have fueled the rise in oil.  I don’t believe necessarily that we will run out of oil in the next decade, but it is a matter of time.  Oil and other fossil fuels are a limited resources.  It’s not a question if we’ll run out, but when.  In this regard, high prices are the answer to the long term problem. Higher prices will force us to rethink where we get our energy and how we use it.

I’ve been rather unattentive to my blog. I apologize to my readers for that. Been busy at work, and other stuff. This blog ultimately is not by number one priority, despite my desire to make it at least in my top 10 priorities.  Anyhow, to the main topic.

I’m personally perplexed at the state of the Consumerist Americana. I had been very hopeful that with the current housing downturn that Americans were finally ready to learn a lesson. I commented as much a few months ago.  I spoke too soon, and have been proven wrong.  Consumers are turning to plastic now that they’ve drained their home equity/piggy bank.  There’s no question that many Americans are suffering hard times.  Just as there’s also no question that too many Americans have also lived beyond their means.

I’m not against debt. I think debt can be a useful tool. I’ve got quite a bit of debt. Student loans and mortgages.  Properly managed debt has it’s place. The problem with debt under which I include dipping into home equity, is that it allows too many people to achieve instant gratification. If there’s a skill that modern man has forgotten, it’s the ability to delay gratification. In the old days, you had to save money if you wanted to buy something. Some people still do, but too many buy first and ask questions later.

So what does this all mean? Not sure. Though I’ll join the Greek chorus of Cassandras, and simply state the bill will come due at some point.  Hopefully soon.  I feel it’s much better to learn our lessons, endure some pain, and emerge a stronger economy of prudent consumers.  The longer we put it off, the greater the crisis.

I’m a great lover of food. There are few foods I dislike, mushrooms probably being the most notable. Recently I’ve been trying to be more conscience of my grazing habits. I want to eat well, but I also want to eat in a sustainable manner. One of the things I’m trying to cut back on is certain types of seafood.  Much of the most popular seafood; tuna, shrimp, chilean sea bass, etc are either endangered in the case of bluefin tuna or raised in an environmentally destructive manor as with shrimp.

I’m probably going to pick up a copy of Bottomfeeder: How to Eat Ethically in a World of Vanishing Seafood. Taras Grescoe the author was recently interviewed on Salon.  I like food books even when they’re an attack on the things I love.

I’m never going to be utmost environmentally conscience consumer.  Vegetarianism is probably the way to go, but I like I meat more than quite a bit. Seafood, however, represents a unique ethical problem.  Seafood as the name implies is harvested from the seas. But who sows and tends these crop? Hardly anyone.  The oceans as they rightly should be, belong to everyone and as result nobody actually takes any ownership. The Oceans are the ultimate commons.  Fishing boats from around the world fish the same seafood thousands of miles from home shores.

As with most commonly shared resource, an ethical crisis tends to arise - Tradgedy of Commons.  Simply stated Tragedy of the Commons is that individuals in this particular case the fishing industry from a multitude of nations act logically in their own self  interest to overuse the common resource of the oceans.  All food production has an environmental impact, but oceanic fishing is one of the few that takes place free from national borders.  It’s a difficult industry to regulate, and as result it’s even more critical how we as consumers behave. The burden is upon all of us to collectively demand environmentally sustainable fishing by adjusting what we eat. The Salon interview highlighted a fantastic tool from the Monterey Aquarium on what to buy and eat.  As a result I had mussels instead of the Atlantic Halibut last night.  It was cheaper to boot.

After reading this article on CNN, I felt sick in my stomach about the current state of American values. As the current mortgage crisis continues to unfold, I’ve become more cynical. I had my reservations around the bail out of Bear Stearns, especially after JP Morgan quintupled it’s offer to $10. I still feel for many the Americans who are struggling in souring American Economy with mortgages they can’t afford. I have no such sympathy for the Copes whom CNN profiled.

It’s not because they worked in the heart of the subprime mortgage industry in Orange county. Employees are often as much victims of short sighted business practices as customers. Ask the numerous ex-employees of Enron.

I’ll let quotes from the article speak for themselves with some help from my own commentary

• “The two didn’t say exactly how much money they made at their last jobs but Kent admitted they each had six-figure incomes.”
• ‘”We’ve used up most of our reserves, cashed in her 401K,”‘ - Given they were making over 200k, you would think they wouldn’t have to resort to dipping into the 401k
• “Today, they’re trying to get by on his unemployment benefits of about $450 a week, which covers only about an eighth of the basic payments they owe every month” - If basic payments are almost $10,000/month, I hate to think what their total expense are.
• “And they’ve made cutbacks: trading in Kent’s Corvette for a Suburban and getting rid of the gardener, for example” - A Suburban is a cutback?
• ‘”You know you could take a roller coaster ride down,” he said. “But you never envisioned it could be a free fall.”‘ - Aren’t you basically in a free fall on roller coaster on the way down

I feel bad for coming away from the article so critical of Copes. I actually don’t particularly like casting judgement, even though I do it all the time. We all have our financial shortcomings. I’ll be the first to admit that like the Copes, I eat out too much. However, having just come back from Southern California and Orange County, I readily see how things have gone wrong.

Orange county is amplification and microcosm of America. We’ve become a country too concerned with immediate gratification rather than long term satisfaction. The Copes are in their predicament not because they didn’t earn good money. They did. They are in their predicament because they had neither a contingency or sustainable plan. If you know you’re on a roller coaster, then you should know that you need to build and save energy (money) on the way up to use on the way down.

The recent of bailout of Bear Stearns have fanned the flames of class warfare. Personally I’ve yet to make up my mind if the bailout is a good thing or a bad thing. I don’t know enough about how Bear was tied up with other firms, and what it’s failure would’ve implied for the market as a whole. Without knowing all those facts it’s impossible to know what effect the collapse of the firm would’ve had on the entire financial market.

I’m not opposed to government intervention despite my seeming rant on the Fed’s Term Auction Lending Facilities. I think the Government has important role to ensure the market behave smoothly and fairly. I believe that role includes helping the neediest Americans so that they can get a leg up, and assisting the financial markets when they run into trouble that has the potential to cripple not only the US economy but the world economy.

Many people like to view bailouts of financial institutions through the prism of class of warfare, just as some of differenint political stripes view government assistance programs through the other side of the same lens. I certainly have my own politics, but see problem with neither. I believe what’s good for the goose is good for the gander. However, I’m probably more worried about moral hazard than treasury secretary, Henry Paulson.

Moral Hazard is typically used when talking about Insurance (and that’s really what Government intervention is). The classic example is that drivers may drive more dangerously when they know they’re covered by auto insurance. Moral hazard is not isolated to insurance. Moral hazard exists in many different situations in which the person or institution does not bear the full repercussions of risky behavior. In the case of Bear Stearns and other financial institutions, the moral hazard is that they will take on too much risk in lending and investing because they know the Government will bail them out in the end. Personal and Corporate Bankruptcy laws offer the same kind of perverse incentive to take too much risk.

I argue that moral hazard exists and is something that we need to be vigilant about. I do however agree with Paulson that we shouldn’t avoid action only in order to avoid moral hazard. Safety nets such as the government guarantees of Fannie Mae and Freddie Mac benefit consumers by lowering borrowing costs. Other insurance such as unemployment benefits help American workers stay on their feet in times of need. The crux of insurance and the conundrum of moral hazard is that risk is potentially socialized from the reckless to the prudent. This is the cost of being in tightly knitted and constructed society. Most of the time, I believe the benefits outweigh the costs.