Home » 2008 » July

Monthly Archives: July 2008

Is oil’s reckoning day finally coming?

I don't believe demand in developing countries can drive oil price this high in such a short period of time. Speculation, flight to quality or safety,  in time of crisis and rising inflation, or whatever you call it, is the ultimate culprit.  Now, various indicators seem to point out we are finally near the reckoning day: the bubble burst time.
According to WSJ's commodity report,
The market has taken on a distinct chill…with funds looking to sell oil futures outnumbering those seeking to buy for the first time since early 2007, and most of the long-term money betting that oil prices will continue to sink.

Perhaps the best glimpse of the changed sentiment can be seen in traders' prices for oil far into the future. In late May, contracts reaching out to 2016 were all selling for more than the then-current price, which was around $130 a barrel. That trend held until the middle of this month.

The curve has since sharply reversed, so that contracts for oil four or five years from now are going for less than the current price. Trading on the Nymex has tilted toward short sellers, or those betting that prices will go down, according to the most recent report by the Commodity Futures Trading Commission.



Also, according to Paul Krugman, high oil prices reduces demand with a delay. First, people don't think the high price will sustain, so they keep their driving behavior or still buying big SUVs; after a while, people gradually realize this time is for real, so started to shift their habits, then you see a big demand drop.  Krugman summarizes this in a nice graph, a modified version of the demand curve:

Ed Glaeser: State of the city

Edward Glaeser, a prominent Harvard economist on urban economics and cities, talks about how gas price affects the behaviors of Americans living in the suburbans, and why fast growing cities such as Atlanta, Dallas, Houston, and Phoenix offer an astonishingly high standard of living for ordinary Americans.

Property rights and China’s future of development

Land reform and establishing a more clearly defined property rights will become the imperative for China's next stage of development. Watch this video and you will know why. 
Also read my recent piece on China's prospect of catching up the US.

Charlie Rose Conversation with Mohamed El-Erian

El-Erian, PIMCO’s co-CEO and former CIO at Harvard Management (courtesy of Big Picture).

Another ripple effect of high gasoline price

WSJ reports: high gas price causes Americans to cut back driving, reducing Federal fuel tax income, which is the financial source to repair and maintain highways and mass-transit systems.
A report to be released Monday by the Transportation Department shows that over the past seven months, Americans have reduced their driving by more than 40 billion miles. Because of high gasoline prices, they drove 3.7% fewer miles in May than they did a year earlier, the report says, more than double the 1.8% drop-off seen in April.
[Before its collapse last year, the Interstate 35W bridge in Minneapolis was part of the one quarter of the nation's bridges that are considered either 'functionally obsolete' or 'structurally deficient.']
The cutback furthers many U.S. policy goals, such as reducing oil consumption and curbing emissions. But, coupled with a rapid shift away from gas-guzzling vehicles, it also means consumers are paying less in federal fuel taxes, which go largely to help finance highway and mass-transit systems. As a result, many such projects may have to be pared down or eliminated.

Meltzer: Keep the Fed Away From Investment Banks

Alan Meltzer, economist and historian on the Federal Reserve thinks it’s a mistake for the Fed to expand regulatory power to include investment banks. A clear rule on capitalization would suffice.

“In its 95-year history, the Fed has never made a clear statement of its policy for dealing with failures. Sometimes it offered assistance to keep the bank or investment bank afloat. Other times it closed the institution. Troubled institutions have no way to know in advance whether they will be saved or strangled. The absence of a clear policy statement increases uncertainty and encourages problem institutions to demand loans and assistance. Large banks ask Congress to pressure the regulators. Taxpayers pay for the mistakes.”

It’s an excellent piece. Read full article here from WSJ.

$4 Oil: Police Patrol on Foot

Another story of high oil price altering people's behaviors (source: NY Times)

As gasoline soars past the $4-a-gallon mark, police chiefs in towns and cities across the country are ordering their officers out of the car and onto their feet in a budgetary scramble.

Chief Jones budgeted about $60,000 for fuel in the fiscal year that ended last month; the department spent $94,000. This year, he budgeted $163,000 — a large line item in a budget of $3.8 million.

The Houston Police Department exceeded its gasoline budget of $8.7 million last year and expects to spend $11.3 million this year. San Diego, which budgets fuel costs citywide, already expects to exceed its budget for the fiscal year that started July 1 by $1.5 million.

Obesity, technological Change and Price Theory

Why so many people are obese in rich countries?   Price theory surely offers you a good explanation. Listen to this Bloomberg interview here.