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Thesis & Antithesis

A critical perspective on energy, international politics & current affairs

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Location: Washington, D.C.

greekdefaultwatch@gmail.com Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

31 July 2006

Strip poker joke

This is from Reuters: “It started as an April Fool's joke but an Irish bookmaker's proposal to hold the world's biggest strip poker contest will become reality next month. Paddy Power floated the idea as a joke but it generated so much interest -- and hundreds of requests to take part -- that the Dublin-based company decided to organize a contest.” (link)

27 July 2006

Oil profits, again

ExxonMobil, British Petroleum, Royal Dutch Shell, and ConocoPhillips released their earning reports for the second quarter of 2006. Here are their results (operating income): Exxon: $10.3bn, BP: $6.1bn, Shell: $6.3bn, COP: $5.2bn. Needless to say that this news will spark anew a debate about corporate profits and the money made by the oil industry; but an equally interesting number is how much these companies invested: Exxon invested $4.9bn in the second quarter, BP $3.7bn, Shell $6.7bn, and Conoco $3.6bn.

It is not just that oil companies are investing so much of what they make in new and existing projects (although part of their problem is that there are fewer and fewer good projects to invest in), but these numbers should remind us that big oil makes big money in part because the investments needed to bring oil and gas to market are huge. Few industries require so much investment to maintain growth, and whenever there is talk of “excess” profits, it is worth remembering that the money is not a windfall that came from the sky but rather the result of large investments made in (usually) inhospitable environments and often in conjunction with governments that have no hesitation to change contract terms years into the life of a project.


23 July 2006

The gains of war

The Levant continues to erupt in flames and the discussion has narrowed on the humanitarian tragedy that has accompanied Israel’s attacks on Lebanon, as well as the idea that Israel is resorting to disproportionate violence to achieve its aims. Here is one great quote on the occasion from an op-ed that Fouad Ajami wrote for the Wall Street Journal; Ajami writes of Hassan Nasrallah, Hezbollah’s leader: “There was something to Nasrallah’s conduct that recalled the performance of Gamal Abdel Nasser in the Six Day War of 1967. That leader, it should be recalled, closed the Straits of Tiran to Israeli shipping, asked for the evacuation of U.N. forces from the Sinai Peninsula -- clear acts of war -- but never expected the onset of war. He had only wanted the gains of war.”

Fouad Ajami, “Hostage to Hezbollah,” Wall Street Journal, 21 July 2006

The exaggerating conspirator

An op-ed in today’s New York Times explores the meaning and limits of academic freedom; the piece was prompted by a lecturer at the University of Wisconsin at Madison who “acknowledged on a radio talk show that he has shared with students his strong conviction that the destruction of the World Trade Center was an inside job perpetrated by the American government.”

A thought comes to mind is how the exposure to conspiracy theories can be rejuvenating. I always remember that my first traces of pro-Americanism emerged after excessive exposure to anti-Americanism. Reading conspiracy theories made me crave for evidence and argument and a desire to move beyond speculation and innuendo and subject political analysis to rigorous argument and analysis.

Whenever I engage in an argument about American policy, I always turn to the same starting point—is it possible that all the conspiracy theories on America are true? It is through excessive exposure to the ridiculous aspects of anti-Americanism that one can begin to acquire a more nuanced—and maybe favorable—view of the United States.

Stanley Fish, “Conspiracy Theories 101,” New York Times, 23 July 06 (link)

22 July 2006

The Stingy NOC?

That National Oil Companies (NOCs) pay a premium to gain access to reserves abroad is accepted almost as a given, especially by those who are alarmed by the expansion of Chinese oil companies in foreign lands. But here is a graph from Wood Mackenzie, printed in last week’s Oil & Gas Journal, that tells a very different story: it plots the implied price of oil in upstream acquisitions over time. True, this is an incomplete image of the argument, which includes the accusation that NOCs pay a premium to gain access to reserves (while this plot only looks at acquisitions). All the same, it is very interesting to see that NOCs have paid less than their International Oil Companies (IOCs) counterparts in recent acquisitions.


16 July 2006

Tale of two launches

A UN resolution on North Korea is expected to push the country back to six country talks; “I think ultimately North Korea will have no choice but to return to the talks and pursue denuclearization of the Korean peninsula,” said US Secretary of State Condoleezza Rice. The resolution calls on North Korea to stop its ballistic missile program and on member states to prevent exports and imports that could assist Pyongyang in pursuing its WMD program.

Last week, the Financial Times ran this cover in its US edition: on the far right of the page it had news on North Korea launching a missile; and in the middle there was a photo from the launch of the Discovery. My point is not moral relativism—I do not think the two actions equivalent. But I am wondering why is it that when a country such as America (or China) launches a missile in space, there is considerable pride in the act, but when North Korea launches its missiles, we ignore pride as motivator for its actions.

North Korea is a wretched place, there is no doubt; and Kim Jong-Il is desperate for attention that his country’s accomplishments do not deserve. Not giving in to blackmail is a fine and principled position for the world’s countries to take; but without offering more of an alternative world for Pyongyang, I hardly see what would make North Korea turn. Threaten to isolate the world’s most reclusive state; or threaten to attack a country that feels the Korean War is still being waged and whose paranoia is unmatched in today’s world?

Forgive my skepticism.

15 July 2006

Basayev in verse

This week marked the death of Shamil Basayev, a Chechen rebel leader most notoriously famous for the siege of a school in Beslan in September 2004 which claimed the lives of over 300 people, most of them children. There is an excerpt from an old Economist article which I thought fitting for the occasion (from December 2004):

But the worst blows of all, as so often the case,
Were the blows meted out by our own human race.
And of these there were few that could ever compare
With the slaughter that opened the Russian school year.
Three hundred children, perhaps many more,
When the classrooms were stormed were found dead on the floor.
Chechen guerrillas were plainly to blame,
But many thought Russia shared some of the shame
For badly mishandling the siege of a school
And repressing the Chechens who wanted home rule.


Qatar and the G8 summit

As the world’s leaders gather in St. Petersburg to discuss, among other things, energy security, my mind keeps going to a land far away: Qatar. Yes, I know Qatar is not part of the G8; and yes, discussions on the Middle East will focus on more explosive topics such as violence in the Levant or Iran’s nuclear program. And yet there is a reason to think of Qatar as the world grapples with the theme of energy security. Qatar’s recent history reveals a lot about how our energy world could be made more secure and stable.

Begin not with Qatar, but with the concept of energy security itself. At its core, energy insecurity is a political problem, emerging largely from the ambitions of producers who wish to extract political concessions through their energy resources. Think of “safe” energy producers: the United States, the United Kingdom, Norway, Australia, etc. Their common denominator is that they do not use their energy reserves as a tool of policy, at least not in any significant way. Contrast that with Iran, Saudi Arabia, Venezuela, or Russia, whom we would associate, quite correctly, with fiddling with their energy sources to achieve a variety of political objectives.

What distinguishes these two groups of producers? At first glance the question seems absurd—does one need to list the differences between the US and Saudi Arabia, or between Norway and Iran. But stay with me. For “safe” producers, oil or gas is not a policy tool because it is not a distinguishing feature of their place in the world. The US, the UK, Norway, Australia would still know what their role in the world would be even if they had no drop of oil. Granted, it helps that these countries discovered energy reserves late; but this is another reason they hardly think of how to make use of their energy sources to get a voice in the world.

What about our other group? What would Venezuela be without oil? Kuwait? Is it a coincidence that the Soviet Union, a superpower, never cut off gas supplies to Europe during the cold war, but that Russia used gas to achieve political objectives a multiplicity of times, most recently against Ukraine in January 2006? Or, is it a coincidence that Saudi Arabia has been a largely reliable producer (facilitated both by huge reserves and by finding a niche in being a swing producer) while at the same time being comfortable in knowing that it will remain the custodian of the two Holy Cities of Mecca and Medina?

A country will use what it can to find a place in the world, and oil is an ideal candidate for countries that feel they have little else with which to attract the world’s attention. This brings me back to Qatar. In 1996, Qatar founded Al-Jazeera, a pan-Arab TV station that has revolutionized how the news gets reported in the Arab world and which accords Qatar a great deal of soft power in the region. Qatar is also host to CENTCOM, the American military command in the Middle East, a privilege which gives it influence and protection. Slowly but steadily, Qatar has built a niche for itself, founded on energy but not entirely dependent on it. Meanwhile, the risks associated with doing energy business in Qatar are rather low, meager when compared to other energy-rich countries in the world.

Qatar’s lesson for energy security is that a country which feels secure about its position in the world is much less likely to fiddle with energy to try to get the world’s attention. And that is as good a starting point for energy security as one can hope for.

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14 July 2006

A cynical European

Two different stories caught my eye in yesterday’s Financial Times: the first is that CNE, the Spanish energy regulator, is poised to do what it can to frustrate a bid by the German company E.On to buy Endesa, a power utility in Spain. CNE, the FT reports, will require that E.On sell off part of Endesa’s nuclear and coal plants, thereby changing the nature of the company to be bought and stripping E.On of assets that produced 60% of Endesa’s output last year.

(It should be noted that Gas Natural, another Spanish company, has already made a bid for Endesa, albeit for less money and some stock. Endesa’s board has considered both bids as unsatisfactory, not valuing Endesa for what it is worth. Gas Natural would also be required to sell some of Endesa’s assets, though they would go to another Spanish firm, Iberdrola).

The second news item concerned the amount of structural funds allocated to European countries for the period 2007-2013. The total amount would be €308bn for the seven years with Poland to get about €59.7bn, followed by Spain (€31.5bn), Italy (€25.7bn), the Czech Republic (€23.7bn), Germany (€23.5bn), Hungary (€22.5bn), Portugal (€19.2bn), and so on and so on.

These two stories, I find, revel a lot about the current state of affairs in the European Union. Yes, there is continental idealism; and yes, the bonds that connect Europeans today far exceed any that have connected them in the past. But deep-seated nationalism and resistance to foreign exchange remains, even among European friends. And for many people and businesses, the most tangible effect of the European political project is to be found in subsidies or funds extended from Brussels. What would happen if and when the funds run dry? How much political allegiance will they have bought? Judging from recent reactions on cross-European merger activity, my bet is: not enough.


11 July 2006

Coping with high oil prices

The most surprising feature of the current oil crisis is that it does not really feel like a crisis. Oil and gas prices may be high and many people are struggling to cope with rising energy bills, but at a macro level, the world’s largest economies have grown consistently in the past two years. Hardly is our fear realized—that high energy costs will force an economic downturn, much less a recession. What explains this disconnect between expectation and reality?

To examine this question, take three mechanisms through which oil prices affect economic performance (there are more, but let’s focus on three): a reduction in income caused by the need to spend more money on energy leads to reduced demand for goods and services and this, in turn, forces an economic slowdown; an increase in inflation generated by higher prices that firms charge to cover energy costs leads to a reduction in real income; and worsening performance by firms, reflecting mainly higher costs and/or reduced overall demand by shrinking real income.

Begin with the first mechanism: US households spend more money on energy today—that much is obvious. But as Figure 1 shows, the amount spent on energy as a percentage of personal consumption is not very high, certainly not as high as it was in the late 1970s or early 1980s, when over 9% of personal consumption went to fuel oil, coal, electricity and gas. In 2005, energy expenditures as a share of consumption were 5.8%, up a full percentage point since 2003, but still below peak levels. Granted the data is not unambiguous—for example, current consumption is linked to high debt levels—but there is a clear sign that today’s high energy prices are not putting a strain on the economy that is comparable to that felt in the late 1970s.

What about inflation? Over the past fifteen years (1990-2005), there has been an observable decline in inflation, driven by a variety of factors unrelated to oil. As Figure 2 illustrates, the link between higher oil prices and inflation is all but clear (here is shown the Consumer Price Index excluding energy prices to gauge the effect of energy prices on other goods): in 1999-2001 there seem to be a rise in oil prices that is followed by an increase in inflation; after 2002, however, oil prices go higher, as inflation goes down; and by 2003, oil prices skyrocket, with only a minimal effect on inflation. Here, again, there are various exogenous factors to consider—mainly better macroeconomic management and the influx of goods from China, which have kept prices low. But this does not negate the underlying fact—that higher oil prices have not generated inflation, at least not to the level expected (and feared) by observers.

This reality produces the following question: could it be that firms are taking the hit? It is possible that firms would try to absorb energy costs in order to maintain demand for their goods. If this were true, we would expect firms that need a lot of energy to suffer more than firms that need less energy for their outputs. There is some evidence for this hypothesis, though the verdict is ultimately mixed: as Figure 3 shows, utilities and transportation—two energy intensive industries, had mixed results in 2004 with the former turning a profit while the latter suffering losses. From the rest (excluding Agriculture and Mining), there appears some trend, albeit weak, linking higher energy intensity and lower profits. At the same time, the numbers involved (energy costs at around 5-10% of total intermediate costs, and generally high profits) for most industries suggest that we cannot rely on this explanation—that firms are taking the hit—for understanding why oil prices are not having a large effect on the economy.

Perhaps the clearest view on this question comes from a more basic statistic: how much do firms spend on energy? Figure 4 shows gross output in the United States for the years 2000-2004 (gross output is labor and capital expenses, which make up GDP, as well as firm expenditures on energy, materials and services). The left axis plots gross output while the right axis shows total energy costs. What is impressive is that energy costs make up such a small portion of total costs (or total output). Even with high prices in 2004, energy costs make up about $450bn or 4.5% of total input costs. More than anything else, this should underscore why large changes in energy expenditures are not placing as high a strain on the economy, even though the fact that prices have risen more orderly than in the past may help explain why the adjustment has been less painful.


Granted, economic performance is but one aspect of the current energy crisis; it may not even be the most important. Granted too, that these numbers rest on a macro-level analysis and may conceal many problems, not least that of that families trying to pay their energy bills. Granted also that there are many international dimensions (even imbalances) to consider that may be salvaging economies from recession. But there is still some truth in here—that economies can grow in spite of high energy prices should make us rethink energy security and the calamities we tend to associate with rising oil costs. It may also give us some reassurance about our ability to make the transition from hydrocarbons to other energy sources as painless as possible. And that is good news for the long term.

Figure 1 data come from the Economic Report of the President (February 2006); Figure 2 data come from FRED—the Federal Reserve Economic Data; Figure 3 and 4 data come from the US Department of Commerce, Bureau of Economic Analysis, while the WTI spot prices for figure 3 are from the Energy Information Administration. All numbers / years are latest available.

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08 July 2006

Steps to energy security

(This is a letter that the Washington Post published on July 8. Link to the letter and to the original story)
Sebastian Mallaby ["What 'Energy Security' Really Means," op-ed, July 3] provides a sensible contrast to the hype that often accompanies energy discussions. Yet he errs on two counts. The first is in describing China's energy security strategy solely as "buying stakes in foreign oil fields." China is not driven by a false sense of security (at least not fully). Chinese oil companies are involved in exploration and production, helping to bring oil to market. Given that lagging investment is one reason oil prices are so high, this is not an unreasonable policy.

The second error is to assume that producers and consumers have identical interests. At one level, this surely exists: Producers and co
nsumers have a common interest in energy markets. But producers tend to want political benefits from their energy, while consumers prefer access to energy with few strings attached. This divergence produces tensions; for Russia and Iran, for Venezuela and Bolivia, oil and gas will never be just commodities. Energy security can build on common bonds, but there are inherent limits to a purely commercial approach to energy.


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04 July 2006

How vulnerable to oil prices? Part 3

Two more thoughts on this mini series. The first is a closer look at two energy intensive industries: transportation and utilities. There are a few interesting points to be made here; the first is that supply costs (which include other materials and services, but not labor and capital) rose on average by 12% between 2000-2004, even though energy prices rose by 23%, indicating that high energy prices were not driving supply costs at the same pace. Most industries were also able to pass on costs to consumers (costs increased by 12%, prices by 10%). In three industries, they were not: pipelines, warehousing and utilities. The former two happen to have high elasticities, meaning that their business output fluctuates along with prices preventing them from passing on costs to customers. Utilities managed to pass on enough costs (19% rise in prices, 28% rise in costs), while maintaining a healthy profit increase (at least in 2004: 7%).

The second thought comes from this graph, which plots gross output based on its various components: capital, labor, energy, materials, and services. The line shows expenditures on energy as an intermediate input (used to generate a good or service); although spending on energy has increased (from $350bn in 2000 to 430bn in 2004), it still forms a tiny fraction of overall output: no more than 2% of gross output, or 5% of costs (energy, materials and services). And so, despite the increase in prices, energy costs remain a small expenditure for firms.


My parting thought on this series is that the main mechanisms through which high energy prices would force an economic slowdown seem not to operate. Granted, much of the current growth, in the US and elsewhere, is fed by macroeconomic conditions whose longevity may be questionable (especially debt spending in the US). At the same time, energy seems to form just a part of that equation, and not a big one either. Whether energy costs do not matter or are guised by booming economies who are bound to come crushing down remains to be seen. But there needs to be much more attention on this great puzzle, why are we not more vulnerable to high oil prices?


02 July 2006

How vulnerable to oil prices? Part 2

My post on the observation that high oil prices have not forced a slowdown in economic growth was based a macro view of the world (“How vulnerable to oil prices,” 27 June 06). A micro analysis supports the overall thesis that energy costs are less important than they used to be, and it also reveals trends which are consistent with theory and common sense. To conduct a micro analysis, I asked the question: how are households and industries affected by high oil prices?


Personal consumption is what non-government entities spend every year (the difference between income and consumption is savings / investment). The question to ask in terms of oil prices is this: how much consumption goes to energy-related expenses? The graph below plots this: the blue line calculates total spending on gasoline oil, fuel oil and coal, and electricity and gas. Then, the red line plots what percentage of total consumption these expenditures make up.

As expected, although energy-related expenditures have increased since 1960, they form a smaller share of total consumption; and even though this trend is reversing, the 2005 figure (for first half of 2005) is still lower than either pre-1973 levels and considerably less than the energy crisis years in the 1970s. What this graph shows is that despite high energy prices, the amount that the US spends on energy as a percentage of its total spending is still small, though increasing.


A second important question in examining GDP growth and high energy prices is to look at how different industries are affected by higher oil prices. The hypothesis here is straightforward: industries that rely more on energy should be hardest-hit and we should expect those industries to experience a greater slowdown when compared to less energy intensive industries. The figure below examines that data for this hypothesis.

On the x-axis is a measure of energy intensity measured as follows: money spent on energy inputs over value added. This is a crude measure of energy intensity, but it is a good proxy, and we can expect that industries with higher values rely more on energy for their well-being. The y-axis plots annual growth in value added for 2004. Our hypothesis would say that we would expect a downward sloping line: the more energy intensive, the less industries grew.

This is what the data show: I have circled utilities and transport, both energy intensive and both confirming the hypothesis. I have also circled mining and farms; the former grew despite energy intensity because it includes oil companies which make more money with higher prices, while the latter grew in large part as a recovery from slow (and negative) growth in the past few years. The rest of the industries reveal a similar pattern: more energy intensity equaling less growth.


What is interesting, then, is that even though there is a link between energy intensity and growth, the effect is not large enough to force either a recession or even a slowdown. There are sufficient industries that are not very energy intensive that continue to grow irrespective of high energy prices, thus ensuring that there is no overall slowdown. At the same time, this may be changing, as a greater share of personal consumption is devoted to energy—if prices remain high, the share of consumption devoted to energy may stabilize, and we will probably need to see a further increase in prices to detect a more sizeable effect on economic growth.