Thesis & Antithesis

Brian the revolutionary

2009-10-25T13:11:00.000-05:00

It is easy to see Monty Python's Life of Brian (1979) as a satire on religion. The signs are there. The biblical setting. Talk of messiah. Blasphemy. Crucifixion. But as commentary on religion, it is not especially profound. Following false prophets, splitting among ludicrous divisions of creed (shoe versus gourd), seeing meaning in garble. These are its messages. Yet it is far deeper as a satire of the revolutionary. What endures is not Brian the prophet but Brian the revolutionary.

The parody of the revolutionary reverberates throughout. Brian hates the occupying Romans “as much as anybody,” but joins the People's Front of Judea as much to fight the Romans as for Judith. From all the in-fighting, Stan/Loretta does not even know the name of his group. “The only people we hate more than the Romans are the fucking Judean People's Front,” says Reg, the group's leader. When Brian suggests to his group and the “Campaign for Free Galilee” that “we should be united against the common enemy,” the unison answer is “The Judean People's Front?!”

Not all revolutionaries have the same task. Reg, the “glorious leader and founder of the P.F.J.,” will be coordinating the kidnapping of Pilate's wife, but “will not be taking part in any terrorist action, as he has a bad back.” Aren't you coming with us, asks Brian. “Solidarity, brother” is Reg's response. “Oh, yes. Solidarity, Reg.” A fanatic's vocabulary is full of symbols to stifle debate and dissent.

There is opportunism in revolution. The People's Front of Judea is secular. After listening to Jesus, Francis notes that, “Well, blessed is just about everyone with a vested interest in the status quo, as far as I can tell, Reg.” To which Reg replies, “Yeah. Well, what Jesus blatantly fails to appreciate is that it's the meek who are the problem.” But as Brian becomes the savior-designate, his revolutionary brothers coalesce around him. He becomes their leader. “Morning, Saviour,” is how Reg greets Brian.

Martyrdom gets some air too. The supremely useless “Judean People's Front Crack suicide squad” kills itself; “That showed 'em, huh” says its leader. Then come the People's Front of Judea to offer “sincere fraternal and sisterly greetings to you, Brian, on this, the occasion of your martyrdom.” Brian replies “You sanctimonious bastards!”

More than anything Life of Brian shows the ambivalence of the revolutionary. This is partly revolution for revolution's sake. When Stan wants to become Loretta to have babies, Judith and Francis stand up for Stan's right to have babies. “What's the point?” says Reg. Francis replies, “It is symbolic of our struggle against oppression.” “Symbolic of his struggle against reality,” says Reg.

The revolutionary cause is unclear. Reg complains of the Romans, “They've bled us white, the bastards. They've taken everything we had, and not just from us, from our fathers, and from our fathers' fathers... And what have they ever given us in return?!” Many answers. Frustrated, Reg tries to put an end to all this, “All right, but apart from the sanitation, the medicine, education, wine, public order, irrigation, roads, a fresh water system, and public health, what have the Romans ever done for us?”

Life of Brian caricatures rebellion and anti-imperialism better than it does religion. It is a satire of the 1960s and 1970s and its message carries through. It is a glimpse of that peculiar beast, the revolutionary, and what carries him forward. It is a satire of the first order.

America in Numbers: Sex

2009-07-15T07:00:00.000-05:00

Do not ask why but I just received and started reading my copy of the Statistical Abstract of the United States (2009), a 1,000-page tome with over 1,300 tables on every aspect of these united states. Before I scare you, or enrage you, or perhaps even bore you with teen pregnancy, abortion, infant mortality, unemployment, poverty, murder, and the like, I thought it best to grab your attention with an easy one: sex. Here you go, then, a brief summary of sex in the US.

The survey in the book looks at males and females 15 to 44 years old in 2002. Of the total, 90% have had sex with a partner of the opposite sex. The rate among teenagers (15-19 years) is lower obviously, but still around 61.6% for males and 62.2% for females. As you move towards older groups, the rate of people who have had sex increases, but there is still a 9% of both males and females with no sexual contact by age 24, and there is also a 1%-2% with no sex by the time they reach 35.

The median number of sexual partners is 5.4 for men and 3.3 for women, which is not surprising (as a fact as well as a result of bragging by men or understating by women). The distribution of sexual partners is skewed: only 12.8% of men report having had sex with only one woman versus 22.5% of females; similarly, 22.5% of males report having had 15 or more sexual partners, including 2.5% of teenage males and 1.9% of teenage females (high school and freshman year must have been crazy). By contrast, only 9.2% of females report having had more than 15 partners. In the middle range (2-14 partners), males and females are similar; they differ mainly on the extremes.

From a racial point of view, the median number of partners for blacks is reported at 8.3, versus 5.2 for non-Hispanic whites and 4.5 for those with Hispanic or Latino origin. For females, the mean is similar for whiles and blacks (3.6 versus 4.1) but much lower for Hispanics (1.7). Blacks are also reported to have a lower proportion of just one sexual partner (5.8%) and higher proportion of 15 and above (33.8% versus 22.3% for non-Hispanic whites). For females, 34.6% of Hispanics or Latinos report just one partner versus 21% of non-Hispanic whites and 12.4% of blacks. On the other extreme, 10.2% of non-Hispanic white women report 15 or more partners versus 8.8% of blacks and 4.6% of Hispanics.

In terms of same-sex contact, the rate for females is 11.2% versus 6% for males, which I think will satisfy a perennial male fantasy. The data on same-sex contact is more sparse but it is also worth noting that 3.4% of males currently married reported having had some same-sex experience; the number for married females was 7.2%.

The final statistic is sexual activity in the last twelve months: about 14.8% of males and 13.9% of females reported no sexual activity the past year. About 62.2% of males and 66.8% of females reported sex with only one person of the opposite sex, while 1% of males and 3.1% of females reported sexual contact with both the same and the opposite sex in the last twelve months. When it comes to teenagers, the spread is bigger with 0.9% of males reporting sex with both male and female in the last twelve months, a number that was 5.8% for females.

References: US Census Bureau, Statistical Abstract of the US 2009, Tables 92-93

From crisis to crisis

2008-11-25T16:30:00.000-05:00

Crisis begets crisis. In the 1970s, high oil prices helped create stagflation, and the cure for stagflation – the Fed raising interest rates – sent Latin America into default. Then with widening US current account and budget deficits, the Plaza Accord helped to devalue the dollar, but the near-term result –monetary easing in other countries – created a stock market bubble in Japan, whose burst triggered an economic crisis.

Now is no different. From the Asian financial crisis, developing countries learned it is better to hoard reserves in good times than to beg the IMF in bad ones. And to deal with the prickled dotcom bubble, the Fed let money loose, and while it celebrated the “great moderation” of low inflation, a housing bubble grew, one snubbed by the Fed since asset bubbles, it claimed, were not for the monetarist to deflate.

There were other problems too: high oil prices transferred wealth from those who had it to those that were not sure what to do with it; China thought it easier to lend money to Americans to buy Chinese goods than to help its own people to buy them; there were American wars and tax cuts to finance as savings were low and household debt up; and Wall Street went into a another collective daydream thinking that if you package assets broadly enough and sell them widely enough, risk will go away. What could go wrong?

It is actually a wonder that this crisis took so long to come. For the past four years it has been “imminent.” The US current account has been unsustainable and the dollar has been about to collapse; housing prices have been about to fall all over the OECD; high oil and commodity prices have been about to create inflation; and the “twin engine” global economy running on US and China has been about to “run out of steam” unless aided by sickly Europe and Japan.

Much as Wall Street is to blame, this was an economic crisis before it was a financial crisis. Now it is a political crisis. How a crisis is solved is as important as solving it. The short-term task is to restore confidence in banking, restore demand, and manage the inevitable downward adjustment of housing prices. And there are absurdities to prevent such as writing trillions in bilaterally traded credit default swaps that appear nowhere in balance sheets, or packaging assets and liabilities in a way that no one understands what is the underlying risk or value.

The longer term challenge, however, is to find a way to arrest the crisis beforehand. For years, the world knew it was on an unsustainable economic path. Save a meagre revaluation of the Yuan, little was done to change course. That reveals a great deal about the growing gap between the reality of the global economy and the adequacy of the institutions to manage it. Without those institutions this crisis will soon beget another.

George Orwell, Restating the obvious

2008-08-03T10:12:00.001-05:00

George Orwell, Essays. Everyman’s Library, 2002. 1,369 pages. $35

I knew George Orwell the way most people know him: through 1984 and Animal Farm, and from some of his better known essays, “Shooting an Elephant,” “Politics and the English Language,” “Why I write” and a few others. This collection reveals another Orwell, adding much depth to the man, while also showing certain sides of him which most of us are less familiar with.

What struck first me in this book was how widely read Orwell was. We usually think of him as a master writer, and he comes across as a having thought deeply about language. But his grasp of the literary work of the nineteenth and twentieth centuries is much greater than I imagined. Not only is he familiar with the major authors, but also with “lesser” works: “good bad books” as he calls them (“the kind of book that has no literary pretentions but which remains readable when more serious productions have perished.”). When told by a publisher that he will re-issue “minor and partly-forgotten novels,” Orwell admits that, “I rather envy the person whose job it will be to scout round the three-penny boxes, hunting down copies of his boyhood favorites.” Even for better known writers, he likes to think of them holistically, often focusing on their lesser known works. Tolstoy, for instance, appears more for a pamphlet he wrote against Shakespeare than for any work. And rarely will Orwell write about an author without putting one piece of work in the context of the author’s total work, good and bad, widely known and obscure.

Originality was Orwell’s chief rhetorical devise. In fact, it is remarkable that there is so little repetition in a book of over 1,300 pages. The essays were written over a twenty-year period (1928-1950), and yet barely a handful can be thought of as repetitive and most manage to surprise even if after you have read much of his work. Think about this sentence: “If one were obliged to write a history of the world, would it be better to record the true facts, so far as one could discover them, or would it be better simply to make the whole thing up? The answer is not so self-evident as it appears.” What rests at the center of his originality is a comfort with contradiction. This passage from “Shooting an Elephant” about his feelings while serving with the imperial police in Burma is most telling: “With one part of my mind I thought of the British Raj as an unbreakable tyranny, as something clamped down, in saecula saeculorum, upon the will of prostrate peoples; with another part I thought that the greatest joy in the world would be to drive a bayonet into a Buddhist priest’s guts.”

The contradiction was firstly personal: his experience in Burma and later in the Spanish Civil War taught him internal conflict and ambiguity, and that attitude guided his work. “If there are certain pages of Mr. Bertrand Russell’s book, Power,” he wrote, “which seem rather empty, that is merely to say that we have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.” The restatement of the obvious became a main preoccupation and, with time, the signature of his writing. In an essay on Rudyard Kipling, he blames T.S. Eliot for not explaining Kipling’s appeal despite having so many detractors. Orwell immediately concedes that “It is no use pretending that Kipling’s view of life, as a whole, can be accepted or even forgiven by any civilised person.” Then, Orwell can more easily consider Kipling’s literary work and appeal.

What allowed him to do that was a belief that art can be aesthetically tasteful even if politically wrong. In a twenty-page essay on Jonathan Swift, he spends the first fifteen condemning Swift’s pessimistic view of human nature; then, he admits that “curiously enough he [Swift] is one of the writers I admire with least reserve, and Gulliver’s Travels, in particular, is a book which it seems to impossible for me to grow tired of.” His most detailed treatment of that subject comes in reviewing Salvador Dali’s autobiography: “It is a book that stinks. If it were possible for a book to give a physical stink off its pages, this one would – a thought that might please Dali, who before wooing his future wife for the first time rubbed himself all over with an ointment made of goat’s dung boiled up in fish glue. But against this has to be set the fact that Dali is a draughtsman of very exceptional gifts.” And then more plainly, “If you say that Dali, though a brilliant draughtsman, is a dirty little scoundrel, you are looked upon as a savage.” That balance, honesty, and aesthetic separation from politics marked his literary analysis.

Politically, Orwell’s chief target was totalitarianism: “Every line of serious work that I have written since 1936 has been written, directly or indirectly, against totalitarianism and for democratic socialism, as I understand it.” In a roundabout way his opposition to totalitarianism comes from his desire for truth and fairness. His “starting point is always a feeling of partisanship, a sense of injustice. When I sit down to write a book, I do not say to myself, ‘I am going to produce a work of art’. I write it because there is some lie that I want to expose, some fact to which I want to draw attention, and my initial concern is to get a hearing.”

What connected that passion for the truth with distaste for totalitarianism was the Spanish Civil War and Orwell’s need to convey the truth as he saw it on the ground and to de-romanticize the contemporary admiration for the Soviet Union. What horrified him about totalitarianism is its ability to manufacture the truth: “From the totalitarian point of view history is something to be created rather than learned. A totalitarian state is in effect a theocracy, and its ruling caste, in order to keep its position, has to be thought of as infallible. But since, in practice, no one is infallible, it is frequently necessary to rearrange past events in order to show that this or that mistake was not made, or that this or that imaginary triumph actually happened.” It is against this fear that 1984 was written.

His answer was socialism. What attracted him to socialism was equality. He had grown and lived much of his life at subsistence or even poverty, and he spoke ill of his time at St Cyprian’s, a school for wealthy kids, which promoted a contradictory moral code: “On the one side were low-church Bible Christianity, sex Puritanism, insistence on hard work, respect for academic distinction, disapproval of self-indulgence: on the other, contempt for ‘braininess’ and worship of games, contempt for foreigners and the working class, an almost neurotic dread of poverty and, above all, the assumption that money and privilege are the things that matter, but that it is better to inherit them than to have to work for them. Broadly, you were bidden to be at once a Christian and a social success, which is impossible.” It is not hard to read some admiration for the shortages produced by the war, nor would he mind wartime rationing in peacetime.

Despite his obsession with socialism, Orwell was not a particularly deep economic thinker. Obviously he writes about economics but from a political or social standpoint. I cannot think of another writer that is more aware of how much things cost and how the prices of little things change with time, at least not one who is not an economist. But Orwell does not consider the economic system as a mechanism that works on supply and demand, or on incentives, nor does he conceive of economic liberty either as a subset of liberty more generally or as a means to political liberty. He read F.A. Hayek’s “Road to Serfdom” which linked socialism to totalitarianism, but Orwell was hardly able to see capitalism as anything more than exploitation: “Hayek’s able defence of capitalism, for instance, is wasted labour, since hardly anyone wishes for the return of old-style capitalism. Faced with the choice between serfdom and economic insecurity the masses everywhere would probably choose outright serfdom, at least if it were called by some other name.”

Of course, Orwell was conscious that socialism was not easy to achieve, and he was even more aware how problematic revolutions can be, a view that has must owe something to his reading of Gustave Flaubert’s Salammbô and Arthur Koestler’s novels: “Revolutions always go wrong – that is the main theme” writes Orwell in a section that contrasts Koestler’s Gladiators with Salammbô. Later in the same essay, he notes that “Revolution, Koestler seems to say, is a corrupting process … it is not merely that ‘power corrupts’: so also do the ways of attaining power.” This essay comes shortly after Orwell completed Animal Farm, and the thematic linkage between the two is unmistakable.

World War II confronted Orwell with a tough choice: he would have preferred a socialist war, and it was clear that neither side if victorious would implement Orwell’s agenda. His position was much a reaction to the thinking of the day, and especially of the intellectuals in England. He summarily dismissed pacifism, as a doctrine which “can only appeal to people in very sheltered positions,” and he sympathized with Kipling’s view that it was “making mock of uniforms that guard you while you sleep.” He grew increasingly patriotic though he had dreaded and opposed the war before it started. His patriotism, in the end, was more than just a preference for truth and fairness – it reflected his own upbringing and instructs. “Most of the English middle class,” he writes, “are trained for war from the cradle onwards, not technically but morally.” He saw in a dream ”that the long drilling patriotism which the middle classes go through had done its work, and that once England was in a serious jam it would be impossible for me to sabotage.”

In a review of a book by Malcolm Muggeridge you see even better that Orwell’s patriotism was emotional more than rational: “I know very well what underlies these closing chapters. It is the emotion of the middle-class man, brought up in the military tradition, who finds in the moment of crisis that he is a patriot after all. It is all very well to be ‘advanced’ and ‘enlightened,’ to snigger at Colonel Blimp and proclaim your emancipation from all traditional loyalties, but a time comes when the sand of the desert is sodden red and what have I done for three, England, my England? As I was brought up in this tradition myself I can recognize it under strange disguises, and also sympathize with it, for even at its stupidest and most sentimental it is a comelier thing than the shallow self-righteousness of the leftwing intelligentsia.”

It is that courage in writing, the willingness to confront and admit personal contradictions, the honesty in admitting when passion overrules reason that we treasure and miss in Orwell, and the chief reason that this collection of essays will be forever my companion.

First, say what’s on your mind

2008-02-10T00:13:00.000-05:00

A friend was sitting at the school cafeteria, looking aimlessly at her iMac, waiting for inspiration to come. She wrote a few words, took a sip of coffee, and then erased them. By the time I sat next to her, her coffee cup was half empty, and the screen was fully so. It was writer’s block at its worst: an email that needs to be sent quickly or not at all (and an email where the writer puts too much thought into details that the reader won’t notice or care about anyway).

“What are you trying to say?” I asked. “Well, I met this man yesterday. We had a good chat but I didn’t have my business card on me. I want to email him and tell him it was nice to meet him and to give him my contact info.” Why not write that, I asked. She paused. She was skeptical. I explained, “Just write: ‘It was nice to meet you yesterday. I didn’t have my business cards on me, so I am writing to send you my contact info’.” She thought for a second. It made sense. She was relieved.

This wasn’t the first time I had offered such advice. In fact, most times I volunteer to help friends with their writer’s block, it is the same story: I ask them what they want to say, and then all I do is write it down while they dictate. It is surprising how grateful they are for such service. It is probably because there is something about writing that scares people into inaction – they freeze at the daunting task of putting their thoughts, simple as they may be, onto paper. The supposition is that writing must be formal and so the usual rules (“just say what you want to say”) shouldn’t apply – or at least that is how most people approach writing.

II

There are three kinds of writing: there is bad writing, made up of convoluted sentences and unintelligible ideas; there is good writing, which conveys a point pithily and clearly; and there is great writing, which moves, excites, entertains or even inspires. Bad writing is value-subtracting, as economists would say – the sentence adds to less than its parts. Good writing is value-neutral. Great writing is value adding – the sentence is more than the sum of its parts as words come together to create new images or emotions or a rhythm that adds to the story or argument.

Bad writing is often the result of people aiming for great writing instead of good writing. Hence the hesitation when starting to write - it has to “sound good.” In reality, bad writing is good writing trying to be great and failing. The rules for good writing are best summarized by George Orwell: write simply, succinctly, and get your point across (he had six rules, but in his spirit, I distilled them into three). My own advice would be “say what’s on your mind; then go back and edit ruthlessly.”

Not all bad writing has such noble roots, of course. A more common reason for bad writing is laziness, the unwillingness to re-read and edit one’s work. This is bad writing as a self-fulfilling prophecy. The logic is simple: I am a bad writer so there is no reason to spend much time trying to improve my writing which will be bad anyway – and indeed unedited or careless writing is inevitably bad writing. This “writing defeatism” feeds on the illusion that good writing comes to good writers effortlessly, a literary deus ex machina, if you will – which is far from the truth, as any self-respecting writer will admit.

An even bigger source of bad writing is bad thinking. Although the author blames writer’s block, it is really the ideas that are poor, not the writing aptitude. Many people make up their minds or refine arguments as they write (I do much of that myself), but it is rare for good writing to save a bad or uninteresting idea. The challenge is how to create a logical and coherent argument, link propositions with facts, and establish hypotheses that can be tested against evidence. The problem of writing is very often the problem of thinking.

III

Aristotle tells us that rhetoric should combine ethos, pathos and logos. Ethos means consistency. If you are a crook campaigning against corruption, your rhetoric is hollow and your speech unpersuasive. Logicians will say that ad hominem arguments are bad – the rebuttal should not be addressed to the speaker’s credibility but to the argument’s logic and evidence. They are right, but as any lawyer will attest, this rarely happens – we care about whether the politician who preaches freedom is autocratic, whether the broker of peace is a murderer, the self-professed philanthropist miserly. Who speaks matters as much as what is said – or at least the character of the speaker makes a difference for the argument.

Pathos is emotion, the ability to excite or energize a crowd. Listen to Neville Chamberlain declare war on Germany in 1939 and you will see what the absence of pathos means: “This morning the British Ambassador in Berlin handed the German Government a final note stating that, unless we heard from them by 11 o'clock that they were prepared at once to withdraw their troops from Poland, a state of war would exist between us. I have to tell you now that no such undertaking has been received, and that consequently this country is at war with Germany.”

Contrast that with Roosevelt’s “Day of Infamy” speech: “Hostilities exist. There is no blinking at the fact that our people, our territory, and our interests are in grave danger. With confidence in our armed forces -- with the unbounded determination of our people -- we will gain the inevitable triumph -- so help us God. I ask that the Congress declare that since the unprovoked and dastardly attack by Japan on Sunday, December seventh, a state of war has existed between the United States and the Japanese Empire.” Granted, Chamberlain and Roosevelt were declaring very different wars and Churchill’s more memorable phrases came at times more threatening to Britain than the fall of 1939. But a country yawning its way into a war will never win.

Logos is logic, the ability to take the reader from the common and acceptable to the unfamiliar and provocative through steps that even the skeptic can follow. I learned the most about logos from two teachers. The first was a historian I did not particularly like and whose class I eventually dropped. Yet he taught me a valuable lesson. He was challenging the conventional wisdom that Napoleon spearheaded nationalism in Europe. I remember him listing his various counter-points (whose details, needless to say, I no longer recall). But then, with a characteristic scorn that befitted a man of his age, education and intellect (and I say this with affection), he concluded: “All you need for good analysis is a solid grasp of fact and a great deal of common sense.” What a thought! Good analysis, apparently, is for everyone – who will admit that common sense and understanding facts are beyond them?

The second teacher was an economist. He pushed us to think about robustness in a way only an economist could – “what if you change this assumption, or this number, what happens to the result?” He would always ask us to examine the weakest link in our thought; what was essential and what not for our argument. Did it all depend on one fact which, if proven wrong, would destroy the whole point? More fundamentally, however, he liked to deflate false authority: “How does he know?” he would say when confronted with a simple and confident answer to a very complex question. Or, more amusingly: “if he’s so smart, why isn’t he rich?” If anything, he taught me that tension, ambiguity, and uncertainty are the basis for logical thought. Honest minds are conflicted minds.

IV

My academic training is in international relations and economics, yet it is my study of statistics which guides my thinking on logic and argument. What distinguishes statisticians from other logical creatures is that they quantify questions such as, “how much evidence do we need to reach a conclusion” or “how sure are we of the conclusion we just reached.” There is a five-step process I learned in an introductory statistics class that I apply: state the hypothesis; articulate the methodology in testing the hypothesis; specify a threshold that your evidence will need to reach in order for you to accept the hypothesis; check the data; reach a conclusion.

I often puzzle friends by telling them I think of a problem as a multivariate regression. A multivariate regression has six elements (pardon the bullet-point exposition again, but that what mathematical thinking is about): the first is the dependent variable, or more simply, the observations which vary from subject to subject (salary, for example). Then come the independent variables which might explain the variation (intelligence, education, experience, etc.). Then, we look at four questions: is the relationship between variables significant (does your salary in fact depend on whether you are more intelligent, educated or experienced); is the relationship positive or negative (do you make more or less with each level of education, more experience, etc.); is it weak or strong (how much more, how much less); and how much of the variation in salary can you explain through changes in the other variables?

True, I do not spell out each problem as a multivariate regression, but I still wonder whether the variation I observe can be explained by the causes I have identified in my hypothesis: what I can explain and what not; what evidence supports and what contradicts my hypothesis; what should my conclusion be in light of the data I have uncovered. Obvious questions, but fundamental too.

V

The ancient Persians had a custom which is relayed to us by Herodotus; “If an important decision is to be made, they [Persians] discuss the question when they are drunk, and the following day the master of the house where the discussion was held submits their decision for reconsideration when they are sober. If they still approve it, it is adopted; if not, it is abandoned. Conversely, any decision they make when they are sober, is reconsidered afterwards when they are drunk.”

Deflating an idea through drunkenness can be a cleansing exercise. A good idea should withstand the perspective and ridicule that comes with alcohol. As JM Keynes put it, “It is astonishing what foolish things one can temporarily believe if one thinks too long alone.” (Those who have seen A Beautiful Mind or Pi will recognize how perspective can lead to breakthroughs.) Logos is about thinking while sober; pathos is looking at an idea while drunk (ethos, by contrast, is avoiding public speaking when too drunk, jeopardizing credibility once and forever). This is not exactly Aristotle’s trio, but he would recognize the duality of argument in soberness and drunkenness, reason and emotion.

I want to end with some advice I got from another professor, who led me to think about how to balance impulse with reason and to have the courage to pursue new ideas. It was a graduate-level class on public finance which, as an eager second-year student, I was taking. We had read a paper arguing that the Magna Carta could be understood by using economic theory. Its method and approach had intrigued me. I wanted to do something similar for my term paper, using economics to analyze the signing of the Treaty of Westphalia. My teacher was obviously uneasy about the choice. He thought it too risky. But then, he wrote this in an email: “Hey, this is only a term paper. One can be a little adventurous.”

It was quite a radical thought, especially for a college sophomore with an ambivalent attitude towards term papers. (I followed his advice but the research yielded nothing.) He was the first teacher to ever tell me to have the courage to “go for it” and see what happens. And that’s the advice that comes to mind whenever I stare at a blank computer screen - just write.

A Buck for Chuck

2007-07-07T13:35:00.001-05:00

In my darker and more cynical moments, I imagine making a campaign contribution to Chuck Schumer, the democratic senator from New York. The amount I would give him would cover the cost of an economics course in a local school because a man obsessed with legislating on economic policy should not be illiterate in economics.

My first encounter with Mr. Schumer was a few years back when he wrote an op-ed in the New York Times challenging comparative advantage (January 6, 2004). According to Mr. Schumer, the theory is outdated because David Ricardo, the theory’s exponent, had assumed factors of production to be immobile. As Mr. Schumer wrote, “Comparative advantage is undermined if the factors of production can relocate to wherever they are most productive: in today's case, to a relatively few countries with abundant cheap labor.”

Comparative advantage leaves much to be desired. It does not explain, for example, what causes countries to differ in their productivities, hence taking as a given a variable that should be explained. And developing countries often specialize in the production of primary goods, thus losing out on the dynamic gains from trade. But Ricardo’s central insight remains: a country benefits from trade even if it is less productive than its trade partners. Factor mobility does not invalidate that point. In fact, trade in goods acts similarly as trade in factors of production. And anyway, factors of production are nowhere nearly as mobile as Mr. Schumer claims.

Now Mr. Schumer is back again. For years he has been musing, along with Senator Graham, about imposing a 27.5% tariff on Chinese goods if China does not revalue its currency. This campaign has been abandoned in favor of implementing trade measures against countries that manipulate their currencies. Mr. Schumer claims the plan is not directed at China (in an article co-authored with three other senators): “our bipartisan legislation is not to punish any one country but to encourage all countries to follow international rules.” But China is the bill’s more immediate and likely target.

Mr. Schumer is an economic looney toon, not to be taken really seriously. But his legislation has drawn support from both Senators Barack Obama and Hillary Clinton, two democratic frontrunners for the presidency. And the legislation is seen as responding to growing anxiety in the United States about free trade. If nothing else, it reveals just how fragile free trade remains to politicians who are keen to exploit voter anxiety (although actual legislation, thankfully, often lags behind).

The most obvious drawback with this legislation is that determining exchange rate manipulation is extremely difficult. Anyone working with exchange rates will admit that predicting exchange rate movements is nearly impossible; economic theories are no better than guessing in being able to forecast exchange rates. Hence, judging what a “fair” value for a currency should be is nearly impossible.

It is equally unclear how much exchange rate movements affect trade flows. According to economic theory, an appreciating currency makes imports cheaper and exports more expensive. If the Chinese Yuan were to appreciate, China’s imports would increase and its exports would shrink. Reality is different, however. The obvious statistic to cite is from the Yuan itself: since allowed to “float,” it has gone from 8.28 ¥/$ to 7.59 ¥/$, but China’s trade surplus with the United States has grown from $162bn in 2004 to $233bn in 2006.

The same is true about the US trade deficit with the Euro area, where the dollar has depreciated more dramatically. After 2003, when the $/€ rate was in parity, the US bilateral trade deficit in goods went from $78bn to $93bn in 2006, despite a drop of nearly a third in $/€ rate. (The deficit stabilized somewhat in 2006). Prices respond slowly and imperfectly to exchange rate changes, making deficits less correlated with exchange rates. An appreciating Yuan, in other words, would bring uncertain changes to the US-China bilateral trade deficit. (Those interested to read more on this issue can look at the IMF’s World Economic Outlook, April 2006, p. 114-115).

Nor is China alone is to blame for the US trade deficit. In 2006, the bilateral US deficit with China was $233 billion, while the overall trade deficit was $838 billion - China accounted for just a quarter of the total. More importantly, US trade with Asia has remained constant over time, with 25% of US exports going to Asia and 36% of US imports coming from Asia in the past five years. The trade with China reflects a shift in production processes – trade that used to be with other Asian countries is now channeled through China.

The truth is that America’s trade deficit reflects underlying economic realities, especially low savings and high spending in the United States, and high savings and low spending in China. The flow of money from China to the United States would be expected to persist as long as these economic fundamentals remained.

The question is whether legislation is the optimum way to address these imbalances. (A more fundamental question is whether imbalances need to be addressed in the first place, but I will stay away from that question for now.) The senators note that, “A little pressure can go a long way to encouraging the right policies.” This is surely naïve: legislation is much more likely to encourage either reciprocal retaliation or, at the very least, a stubborn Chinese reaction.

It is really discouraging to see how much economic debates are detached from economic reality, though this is to be expected, more so in an election period. Trade raises important policy questions, but dealing with them is made no easier by politicians who ignore basic tenets of economic theory and fact. These misconceptions are numerous and above I have just touched on a few. More to come in later posts.

Temporary relocation

2007-03-01T20:30:00.000-05:00

For a few months, I will be writing for my school’s blog http://blogs.sais-jhu.edu/saisgeist/

Who will stand up for the market?

2007-01-17T19:40:00.000-05:00

You have to sympathize with Neelie Kroes, the European Commissioner on competition. For years now she has been screaming loudly that the internal market on gas and electricity, supposedly liberalized and supposedly competitive, is dysfunctional, and that this is no small part because big European utilities are acting anti-competitively. A week ago, her Directorate released a comprehensive inquiry into the gas and power sector in Europe.

The report is enough to make any free marketer cringe. Big companies (“incumbents” as the Commission calls them) are stifling competition. They are able to do that because they have national governments on their side. Either socialist by inclination, or socialist because energy is a “strategic” sector not to be trusted on markets, or socialist because energy insecurity warrants new powers to be granted to government, states are engaged in an alliance with businesses at the expense of the consumer, who is sold the idea, unconvincing at best and ludicrous at worst, that it is really his interests that are being defended.

To be fair, there are certain problems that are fundamentally intractable. Long-term contracts, for example, are often necessary to finance big projects like cross-border pipelines, but they erect barriers to entry and “freeze” market conditions for years as well as adding illiquidity to a market since gas committed to one place cannot flow to another. Infrastructure is supposed to operate on open-access principles (capacity allocated by bidding rather than who owns an asset), but being guaranteed access to a pipeline is often needed before a company can sign deals abroad or commit the money to build expensive projects.

There are other problems too, problems that lie at the core of “Europe.” What is the appropriate level for regulation: at the state or at the European level? How should Europe balance a general commitment to the market (which the EC is meant to defend) with a commitment to democracy (which means states ought to make their own rules)?

What Europe faces, therefore, either than powerful incumbents, is an incomplete consensus on how to deregulate energy, made harder by the fact that each European country has its own view on how to do things and is willing to defend its sovereign right to act differently. Yet it is disheartened to think how all this is playing out. If the European Commission cannot succeed in infusing competition, what are we to think of its powers as the defender of the EU’s laws, and what are we to think of its commitment to the free market?

As I think of this, I am torn between two visions of Europe: one is a persistent, and to me indefensible, tendency to glorify cooperation and uniformity; the other is a Europe that helps member states do the things they are supposed to do by making the politics a bit easier. I have always liked Europe for the latter and criticized it for the former. What the European Commission is doing today on energy I approve and believe in; but it is not succeeding yet, and that makes me sad, both for what this means today and what it spells for the future.

Oil producers and the dollar

2006-12-11T09:05:00.000-05:00

The Financial Times reported on Monday that, “Oil producing countries have reduced their exposure to the dollar to the lowest level in two years and shifted oil income into euros, yen and sterling, according to new data from the Bank for International Settlements.” Although this move has obvious implications for the value of the dollar, there is little doubt that we will soon hear from analysts how vulnerable the American economy remains to unstable regimes that can impose huge costs on the United States if they choose to do so; and the argument will soon convert either into a case for energy independence or a case against China who, it is assumed, holds equal leverage over the United States because it holds so much of American debt.

I thought it best to avoid both of these arguments and just append the relevant graph from the Quarterly Review of the Bank for International Settlements (look at the graph in the far right). The point that should stick out is that while the dollar holdings of oil producers have come down, they have done so from very high levels, and the dollar remains, by far, the most sought after currency for oil producers. While this does not negate the obvious implications for the dollar (which will fall as relative demand for it declines), it should put the discussion in context before jumping onto any grand geopolitical conclusions.

Thanksgiving

2006-11-21T05:30:00.000-05:00

One dog?

2006-11-10T23:35:00.000-05:00

From Al-Jazeera.Net: “Beijing families were first restricted to one child, and now the Chinese authorities have set the limit on pets too with its one dog policy. China's capital will institute a "one dog" policy for each household in nine areas, the official Xinhua News Agency reported on Wednesday." (link)

Lessons from OPEC

2006-10-08T18:40:00.000-05:00

The latest news suggests that OPEC has agreed to cut its quota by 1 mbd, bringing its target output down from 28 mbd to 27 mbd (in August, OPEC produced 30.04 mbd, which included 2 mbd from Iraq, which is excluded from quotas). But reaching consensus was not easy: first came production cuts from Nigeria and Venezuela totaling about 200 kbd. Saudi Arabia protested the move to voluntary cuts, though its own production was coming down too. It took a while before others agreed to reduce quotas as well.

From this picture emerge two interesting points. The first is about OPEC’s cohesion, which fluctuates wildly, though the organization usually comes together more easily when tasked to defend rapidly falling prices (rather than, say, cut production to hike prices). This should serve as a reminder to those who have hasten to notice an “axis of oil” emerging to threaten Western interests. Even OPEC, the most concrete manifestation of the axis, finds it hard reach consensus on oil production. It is hard to see how so varied a group can hold together any other meaningful political alliance for a considerable period of time.

The second point is about asymmetrical power. The common assumption these days is that oil producers have all the power. But the drop in oil prices has seriously jeopardized their fiscal plans. Granted, they have too much money in the bank for anyone to claim that these regimes are in trouble—a $60/bbl world is still great for them. But given how resilient economies have proven to high oil prices, it is not unreasonable to state the oil exporting countries have more to lose from low oil prices than importing countries from high ones.

These are important lesson amidst our energy hysteria.

Sarkozy on Turkey

2006-10-03T00:05:00.000-05:00

From Nicolas Sarkozy, in the Wall Street Journal:

“The decision to accept each new applicant should be taken in light of the EU's internal objectives, its institutional limitations and the level of popular support. Such decisions should not be based upon foreign policy goals or a desire to encourage neighbors to reform.

So who is European and who is not? Clearly, some non-member countries are part of the European continent and have the right to full EU membership. This group includes Switzerland, Norway and -- eventually -- the Balkans. Then there are other countries whose right to join the Union is debatable or who, although neighbors, are clearly non-European.

For this latter group in the Euro-Asian and Mediterranean areas we should avoid presenting them with overly stark choices: Full membership or nothing at all. Our first step should be to establish preferential partnerships so we can work together while still observing our different interests and values.
…
Of all the countries with which the EU should have preferential relations there is Turkey, our neighbor and friend, sharing many of our security concerns and many of our values. These are good reasons for strengthening our ties with Turkey, without going so far as offering full membership.”

The Russian reassertion

2006-09-30T08:50:00.000-05:00

A very interesting graph from today’s Wall Street Journal:

The ritual

2006-09-19T08:25:00.000-05:00

From Gideon Rachman in the Financial Times: “The rituals of the ‘clash of civilisations’ are by now well established. Somebody somewhere in the west ‘insults Islam’ – Salman Rushdie writes a book; a Danish paper publishes a cartoon; the Pope makes a speech – and the demonstrators take to the streets. What better way to prove that Islam is a religion of peace than to burn the Pope in effigy?”

Advice to an oil company

2006-09-17T20:50:00.000-05:00

From the Oil & Gas Journal (18 Sept 06): “Here, then, are two suggestions, for BP or any oil company hoping to address image problems. First, believe in the contributions oil and gas make to human welfare, and brag about them. Nothing sways public opinion more effectively than unabashed commitment. Second, with health, safety, and environment, accept no mistakes, no compromises, and no excuses. Ever.”

Alternatives, and alternatives

2006-09-03T19:40:00.000-05:00

This excerpt from this week’s Oil & Gas Journal rather well the dangers inherent in policy that believes alternative energy is superior merely because it is alternative:

When alternatives to hydrocarbon energy are promoted simply for being alternatives, questions should arise about their effects on consumers, about their costs to taxpayers, about their own environmental consequences, and about how much energy they really can provide. This doesn’t mean resisting nonhydrocarbon energy, the development of which now is crucial to supply later. It means simply that nonhydrocarbon energy will fare best in the long run if decisions about it are made within a framework of market-based principles, oriented to consumer and taxpayer interests and designed to keep expectations realistic.

Difficult bargains

2006-08-25T00:30:00.000-05:00

On Tuesday, Alaska Governor Frank Murkowski suffered a humiliating electoral defeat, coming third in the Republican primary and securing only 19% of the vote. The reasons for his defeat vary—the Wall Street Journal believes “incumbent arrogance” is the problem—but negotiations for the building of a gas pipeline from Alaska through Canada and into the United States has to rank high among his constituency’s grievances.

The idea of a natural gas pipeline linking Alaska to the Lower 48 has been floating for years, and Gov. Murkowski has been an ardent supporter. As governor, he negotiated with the oil companies involved—ExxonMobil, BP, and ConocoPhillips—about the terms under which the pipeline would be built. At issue was the tax rate that would apply to earnings from the oil companies’ operations in Alaska as well as tax breaks on investment that were meant to make the capital expenditures for the pipeline more attractive.

After the governor came to an agreement with the oil companies, however, the Alaskan legislature voted into law a bill that varied from the governor’s initial agreement. The version that became law last week imposed a higher tax rate on net revenues, and also increased that rate as oil prices went higher. Needless to say that the oil companies and the governor were not pleased, and it remains to be seen how this different law will affect the building of the pipeline.

What this story underlines, more broadly, is the difficulty of striking a bargain between state and company when it comes to oil and gas. Venezuela and Bolivia, for example, are accused daily of bullying oil companies and of being inhospitable to foreign investment. It is easy to assume that such issues are the purview of “dysfunctional” polities in the developed world. But Gov. Murkowski’s failure in the Republican primary ought to remind us that finding a proper way to split revenues between the people and the oil companies is always an arduous task.

Oil companies in the wilderness

2006-08-09T22:00:00.000-05:00

A New York Times editorial on the lessons of Prudhoe Bay writes that, “the BP fiasco also reminds us why we should not put the fate of America’s wilderness in the hands of the oil companies.” It is interesting, then, to read that the fiasco has prompted a different reaction on who live in the “wilderness.” Alaska governor Frank Murkowski called on lawmakers to support his proposal for the construction of a gas pipeline that will bring gas from Alaska to the Lower-48 through Canada as a way of diversifying the Alaskan economy.

True, a gas pipeline poses less of an environmental threat than an oil pipeline, and true too that there is still political infighting before the proposal gets approved by Alaskan legislators. But it is interesting to see how different the lessons are on those who live in the “wilderness” and earn their living (plus a check from oil royalties) through the oil business.

References:
“Lessons from Prudhoe Bay,” New York Times, 9 Aug 06 (link)

A conspiracy in Prudhoe Bay?

2006-08-08T23:15:00.000-05:00

Greg Palast never ceases to amaze me; this is his take on BP shutting production at Prudhoe Bay: “Why shut the pipe now? The timing of a sudden inspection and fix of a decade-long problem has a suspicious smell. A precipitous shutdown in mid-summer, in the middle of Middle East war(s), is guaranteed to raise prices and reap monster profits for BP. The price of crude jumped $2.22 a barrel on the shutdown news to over $76. How lucky for BP which sells four million barrels of oil a day.” (link)

Begin with the main error: BP does not sell 4 million barrels a day; it sells 4 million barrels of oil equivalent. Oil production, according to the company’s annual report, was closer to 2.5 mbd in 2005 with the rest being natural gas. (It is actually amusing to see him get this wrong given that he writes, in his bio, that he is “an energy economist.”)

Do the (big picture) math: 2.5 mbd x $2.2 rise in prices comes to $5.5 million a day. What about the loss? From the 400 kbd shut-in, BP is entitled to about a quarter (even less—92,000—by some estimates). So the loss is 92 kbd x $76 is about $7 million a day (even if you discount the oil price, given that Alaskan oil is heavy, the difference is still large). The monetary loss is larger than the gain (puting aside all other issues to reputation, etc.). This is hardly “monster profits.”

If you want to make more accusations, Mr. Palast, at least begin with getting your facts straight.

Are refiners to blame?

2006-08-07T23:00:00.000-05:00

That domestic refining shares the blame for high gasoline prices has been a political accusation for a while now; in April 2006, for example, Senator Charles Schumer (D-NY) accused refiners of keeping plants off-line as they switched to summer fuel blends to keep prices high. Now the attack has come alive again, prompted by a report by Jeff Donn of the Associated Press (link), which claims that gas prices are high because of market power in the refining sector.

The arguments made in the report merit close attention, even though, after close examination, they lose much of their potency. But before turning to the report, here is a graph to get the argument going: it plots the price of gasoline based on where the money goes—crude oil, refineries, distribution & marketing and taxes. Two trends are clear: first is that an ever smaller percentage goes to taxes (since most taxes are unit taxes that do not increase with prices) and second, that more and more money goes to crude oil. Refining and marketing, on the contrary, have retained an almost constant share (a volatile one too) of the final price of gasoline.

What does this say about the AP report? Mr. Donn writes that, “Crude oil [accounts] for just under half the price of gasoline.” Although he writes this to explain the industry position that high crude oil prices lead to high gasoline prices, implicit is the idea that this is not too much (I am reading between the lines here). After all, Mr. Donn writes that, “A big chunk of gas prices -- almost a fifth -- pays refiners who make gasoline from oil,” suggesting that he thinks these numbers important.

The first issue is that how much of the overall gasoline price goes to crude oil is irrelevant; what is important is how much of the change in gas prices can be attributed to changes in the price of crude (in econometrics lingo, how much of the variance in one variable can be explained by variance in other). In a study I did for gasoline prices and crude oil between January 2000 and January 2006, that number was 0.91, meaning that 91% of the change in gasoline prices can be explained by changes in crude oil prices (time series models usually yield very high results anyway, though I did use a control trend variable).

The other interesting number is that the coefficient is 0.80 implying that a 1% change in crude oil prices leads to a 0.8% in gas prices (I used logs; also, I did not test, as the AP did, whether whether prices rise and fall by the same proportions, although I will get to that). These numbers may seem high, but they are consistent both with a look at a graph plotting the two variables (the two really high gas values were September and October 2005 following Hurricanes Katrina and Rita), as well as with other studies (look at the Cato study in the references).

The AP report then goes on to look at refining margins: the difference between input costs (crude oil) and output prices (gasoline and distillate). Below is a graph with that spread, with data taken from the BP Statistical Review of World Energy 2006; one thing to note is that margins have gone up for all three major refining centers, not just the United States (the spike in the US in 2005 is, again, due to Katrina and Rita). If market power alone explained refining margins, there should be a dissimilar pattern in margins (unless we assume that those two centers also have concentrated market power); we would also expect a more consistent upward trend in prices since industry consolidation (in refining) has dated to the early 1980s (after the repeal of the Emergency Petroleum Allocation Act in 1981).

But are there other reasons to expect margins to increase? The AP reports writes, “In a competitive market, when raw material gets more expensive, margins typically shrink, economists say.” This is not necessarily true when demand for the final good is inelastic (as gasoline is). What is more, refineries are capital-intensive industries that exhibit considerable returns to scale. No refinery has been built in the United States since 1976, but overall capacity has increased all the same from 15.2 mbd in 1975 to 17.3 mbd. This has been achieved through capacity expansions at existing refineries and through efficiency gains (for example, by adding catalytic hydrocracking processes that increase the amount of gasoline or diesel that can be extracted from a barrel of oil).

A second reason is that oil coming into the United States is heavier and sourer. The average API gravity of crude oil inputs into US refineries has decreased from 32.64 API in Jan. 1985 to 30.25 in Aug. 2005, and the sulfur content has increased from 0.88 in Jan. 1985 to 1.40 in Aug. 2005. In simple terms, this means that refining is harder because refineries need to make premium content from lower quality inputs. As refining gets harder, it is reasonable to see higher margins, particularly for refiners that can process lower quality crudes. Also, in tight markets, the premium between high and low quality oil increases further given that refiners bid up the price of higher quality crudes much faster than low quality crudes.

Two more points to make: the first is that refining is a separate business, related but not identical to oil. Oil prices reflect the scarcity of oil, and similarly, gasoline prices reflect the scarcity of refining capacity. In 1983, utilization rates were 72% in the United States; in 2004 they were 90.3% in 2005. The scarcer a service becomes, the more valuable it is; no collusion is necessary.

The second is that quality differentials are having a major impact because they limit intra-US trade (the so-called “boutique fuels”). At some point there were 17 different gasoline standards nationwide, although this is set to decrease due to the Energy Policy Act of 2005. But different standards mean that having a surplus in one state and a shortage in another will not necessarily lead to trade. Add to that Congress’ effort to phase out MTBE and replace it with ethanol rather quickly, and this too has created constrains in the refinery market.

What about the idea that prices change asymmetrically: “The Associated Press analysis looked at weekly federal pricing data since September 1999. It found that a gallon of retail gas rose an average of 6 cents for a 10-cent rise in oil, but dropped only 4 cents for a 10-cent decline in oil -- suggesting that gas temporarily resisted downward shifts more strongly than oil.” This is important, but the report offers various reasons that are very persuasive (price stickiness or retailers trying to maximize profits), even though they are dismissed by the author. (Another issue is to examine whether this discrepancy disappears when we use lagged variables—essentially a lower crude oil prices will have an effect after some time given that a refinery still purchased past oil at a higher price and is more inclined to charge more for it.)

In the end, market concentration is surely a concern, although this trend has more to do with the regulatory problems (and adverse economics) involved in building refineries than in any specific design for collusion. It is frustrating to think that an American living in Wyoming will pay more to drive to work because China is buying more oil, or because Kuwait has struggled for ten years to pass a law that will boost foreign investment in its oil sector, or because nearly all of the oil revenues in Mexico go to the government leaving little for re-investment. But it is no less true.

Despite my overall criticism, I am glad that the AP did this study. This has been a popular issue for quite some time and the evidence to examine it has been absent from public debate. It is depressing to hear so many politicians discuss this topic without spending some time to study it methodically; it is even more depressing to think that when I did my own study (for a class), all it really took me was some knowledge of statistics and five-six hours on a Thursday afternoon.

References:
Unless otherwise indicated, data comes from the Energy Information Administration; Nick Snow, “Schumer seeks probe of refining capacity utilization,” Oil & Gas Journal Online, 19 April 06; Peter Van Doren and Jerry Taylor, “Economic Amnesia: The Case against Oil Price Controls and Windfall Profit Taxes,” Cato Institute Policy Analysis (12 Jan 06); Franz B. Ehrhardt, “Refining and price,” Oxford Energy Forum, August 2005; Bob Williams, “Refiners’ future survival hinges on adapting to changing feedstocks, product specs,” Oil & Gas Journal, 11 Aug 2003; “Margins soar,” Petroleum Economist, September 2004; “Attention to refining,” Oil & Gas Journal, 26 Sept, 2005; “Big profits, big decisions,” Petroleum Economist, September 2005; David Nakamura, “Refining industry to sustain strong margins through 2004,” Oil & Gas Journal, 15 Mar, 2004; “Devising a winning strategy,” Petroleum Economist, September 2005

The virtues of populism

2006-08-07T18:00:00.000-05:00

Last Thursday, union workers picketed facilities belonging to the Colombian state oil company, Ecopetrol. Their grievance was a government plan to sell off 20% of the company (not to privatize it fully, repeats the government) in order to raise capital and allow it to explore further in the country. The workers doubt the government’s sincerity and see the in plan the seeds of privatization. So they protested.

So often when I read of Hugo Chavez’s latest shenanigans, I get sad to think how bad populism can be for a country. But now I read this news from Colombia (news that has replicas around the world) and I am reminded of just how hard it is to take on the street. No wonder Chavez (and Morales, and others) just decide to ride the wave of populism rather than try to counter it.

When the good oil company gets hit

2006-08-07T17:30:00.000-05:00

There is irony in the news that BP has stopped operations from Prudhoe Bay due to corrosion in the pipeline system that comes from the field: in an industry with few friends, BP has been an exception, led by the statesman-like CEO Lord John Browne and having a commitment to alternative energy that has earned it many friends in and out of the oil business.

It is ironic, then, to see a company that has developed such a positive image be hit by a wave of misfortune: first came a fire in a Texas refinery in March 2005 that killed 15 and injured 170; then were oil spills in Alaska that culminated in the current shutdown; and in June, regulators charged BP with trying to manipulate the propane market in the United States.

All this comes amidst an internal fight in the company which brought Lord Browne to butt heads with company chairman Sir Peter Sutherland about whether Browne would be forced to retire when he turned 60. A compromise followed by which Browne would step down in the end of the calendar year that he turned 60 (2008), about 10 months after his birthday.

Investigations that will follow may weigh more heavily on BP’s responsibility for the oil spill and the accusation on market manipulation. (BP accepted responsibly for the fire at the refinery.) This will show whether BP has had more than just misfortune.

Even more ironic, however, is that ExxonMobil—a company which a far greater reputation for efficiency in the industry (which includes environmental protection at operations)—is still bedeviled by outsiders, at a time when the same people (I include myself here) hail a company such as BP for its corporate responsibility. I guess there are worse things that being ruthlessly efficient.

Rebelling from afar

2006-08-05T22:10:00.000-05:00

From the Wall Street Journal on Fidel Castro: “Of course it may be no coincidence that most of the admiration all these years has been from afar. The idea of "Fidel" allows his leftish admirers from the comforts of free, mostly capitalist societies to imagine that someone out there is struggling to build a better, more egalitarian way of life -- without any of them having to live amid the daily Cuban reality of grinding poverty and political intimidation.”

This reminds me: one of teachers on the Middle East always likes to point out how the radicals on the Palestinian issue were (and are) so often those far removed from the West Bank and Gaza. It is much easier, it seems, to be adamant and uncompromising from Baghdad or Cairo … just as it easier to earn revolutionary praise from those who are unaffected by your cruelty.

References:
“Romancing Fidel,” Wall Street Journal, 5 Aug 06

Oil costs what we pay for it

2006-08-04T07:45:00.000-05:00

(This is a post I made to an online discussion poll conducted by the Financial Times (link). The question was: Can the world live with oil at $80 per barrel?)

It is almost pointless to ask “Can the world live with oil at $80 per barrel?” For the past few years, the world has lived with very high oil prices and has actually fared quite well, at least at the macro-level. True, economic growth may be starting to slow in some places, but this is often attributable to factors unrelated to oil. Today’s oil crisis is hardly a replica of the 1970s when economists had to coin a new term—stagflation—to describe the peculiarity of the predicament that had befallen upon us.

The reason that the world has coped with high prices is that the price hike is demand driven. Just like any other product, the price of oil is driven both by fundamentals (what it costs to produce it and how scarce it is) and by the market’s willingness to pay for it. Usually prices settle in between these extremes, even in a market where politics tamper with prices all the time. This means that prices are at $75/bbl because firms and individuals think that buying oil at that price is better than not buying oil at all. Ultimately all prices reflect their marginal product and so oil prices will keep rising until the cost of a barrel exceeds its utility for firms and individuals.

The risk that we face today is twofold: first, fuel inflexibility may be forcing buyers to pay for oil a higher price than they can afford. But, thankfully, this is only a short-run issue, and given the economy’s resilience in dealing with higher prices, a longer-term adjustment may not be too painful. The second risk is an asymmetrical ability to pay for oil: given that oil prices are set at the margin, a problem exists if the marginal buyer can set prices that are too high for other consumers. Many fear that China is playing that role today given its ability to grow despite higher oil prices. But this risk, however, is less acute when an overall slowdown in demand will help bring prices down.

In other words, it’s not whether the world can live with an $80 barrel oil; rather, the price of oil will mostly reflect what the world can live with.