Friday, July 02, 2004

On The Wings of The Irish Eagle

I read John Fay's blog at Irish Eagle every day, but unfortunately, it, along with all the other blogs on my blogroll, dissappeared in the switch to the new template.

He writes today on the oil market, but I have more to say in response than I can fit in those little boxes Haloscan provides for comments.

I can at best give some pointers, reguritate what I read in the FT and report folklore among the investment banking community in answer to the questions.

Saudi Arabia - the Saudi economy has gone to hell over the past 10+ years due to low oil prices. Sure, long term they have to do something to encourage people to create wealth and not just cash in on the wealth under the sand, but the higher prices we're seeing at the moment will help the Saudis buy some quiet while they deal with the discontented rabble that is swelling the ranks of the Islamic terrorists.

1. Yes, Saudi's an economic hole. The country has huge debts, and the credit rating, last time I looked, was I think BBB-, lower than Mexico or Russia. I think their trade was back in deficit by about 1981 though, and their terms of trade are not getting any better.

Russia - there's no doubt that George Bush's friend's life is made easier by higher oil prices. I wonder if American equanimity in the face of these higher prices explains Putin's revelation about his warning before last year's invasion.

2. Yes, it's doubtful whether, absent oil price rises and the 1998 devaluation, Russia would have grown at all since then.

Iraq - every barrel of oil coming out of Iraq is selling for more than was expected in the budgeting for reconstruction of Iraq. The less that costs, the easier it will be for Bush to cast the policy in a favorable light.

3. Probably. I'll be looking for figures on Iraqi production soon for something I'm writing. The IEA should have figures, so one can probably do good estimates, as I shall shortly. Niall Ferguson's Colossus (I just finished) and the paper by William Nordhaus (I haven't started reading it yet) on the estimates of the cost of the war on the economics of the whole enterprise.

In general though, I'd imagine high petrol prices for US consumers weigh more heavily than improvements in Iraq's economy in the minds of the voters, even if security is good enough in the first place to export any oil out of the country and then to give foreigners the assurance to invest in exploration and production.

China - the Chinese use lots and lots of oil. And, when it comes to production, they use it less efficiently than Americans. So, although the higher oil prices hurt American business, Chinese businesses are hurting more. A little dampening down of the Chinese economy would help keep China from challenging the US anytime soon.

4. China's energy-inefficient and energy-hungry, but coal probably dominates oil in the mix. Also, it is a large producer in its own right, and is only now starting to import. Its economic and security costs for oil would be much better than Japan or the US though, as it's next door to big fields in Russian and Central Asia.

Kyoto - despite what is generally assumed, the Bush Administration has made a lot of noise about Kyoto, but not formally abrogated (is that the right word? & I'm looking for a link that discusses this) the treaty. Higher gas prices will reduce emissions as people simply drive, fly, produce less than they would if oil were $10 per barrel. This development is a bone to throw to the EU, which is not faring all that well with Kyoto compliance itself.

5. I did a few posts on this back in May, still available here and here, I think it was, giving some links. Another is in draft now, but its a criticism of an argument by the syballant Stephen Schreiber of Stanford who steams supremely at sceptics.

Bush said he wouldn't present it to the Senate, who have the power to reject any treaty, if I remember my Robert Caro.

The McCain-Lieberman bill, to introduce a purely domestic system is up for vote in the Senate. I've only come across one story on this, even using Nexis. I think it's widely seen as a filibuster measure against pork for the oil companies. They tried last year and failed by about 65-35 against.

Scott Barrett, who I might be studying under soon, wrote a book on the art of writing environmental treaties and how Kyoto fluffed it.

I don't know the IPCC models well enough, but I would guess that $10 isn't enough to push the real solution, which is the transition to non-carbon energy. There are models of this but I haven't got the originals, only Lomborg's analysis, which I don't trust and don't find practical as a guide, in this area at least.