Sunday, August 30, 2015

Anxiety turns to fear: Markets, energy, Pan and the Zeitgeist

The characteristic feeling of the post-2008 world has been one of anxiety. Occasionally, that anxiety breaks out into fear as it did in the last two weeks when stock markets around the world swooned and middle class and wealthy investors had a sudden visitation from Pan, the god from whose name we get the word "panic." Pan's appearance is yet another reminder that the relative stability of the globe from the end of World War II right up until 2008 is over. We are in uncharted waters.

Here is the crux of the matter as expressed in a piece which I wrote last year:

The relentless, if zigzag, rise in financial markets for the past 150 years has been sustained by cheap fossil fuels and a benign climate. We cannot count on either from here on out....
Another thing we cannot necessarily count on is the remarkable geopolitical stability that the world experienced for two long stretches during the fossil fuel age. The first one lasted from the end of the Napoleonic Wars in 1815 to the beginning of World War I in 1914 (interrupted only by the brief Franco-Prussian War). The second lasted from the end of World War II in 1945 until now.
Following the withdrawal of U.S. military forces from Iraq, the Middle East has experienced increasing chaos devolving into a civil war in Syria; the rapid success of forces calling themselves the Islamic State of Iraq and Syria which are busily reshaping the borders of those two countries; and now the renewed chaos in Libya. We must add to this the Russian-Ukranian conflict. It is no accident that all of these conflicts are related to oil and natural gas.

As I view the current world landscape, I am reminded of two movies (which I've written about before) that I think capture the Zeitgeist: Melancholia and Take Shelter. In both the protagonists increasingly sense that something is terribly wrong, but can't quite put their finger on it. Everyone around them thinks they are ill or crazy. But for both protagonists, their anxiety comes from an inner vision that stems not from mere psychic disturbances, but rather from alarming real-world circumstances that are about to break into the open.

Sunday, August 23, 2015

Counterintuitive: (Some) volatility is good for you, stability not so much

With stock markets around the world plunging and commodity prices in free fall, it seems appropriate to return to a theme which I've taken up previously: That a certain amount of volatility is good for humans and the systems they build, and that attempts to stifle the natural and healthy volatility of a system can lead to greater and even catastrophic volatility in the end.

All of this runs counter to the propaganda with which we are regaled on a daily basis. For example, investors are told that the lower the volatility of their portfolios, the lower the risk. But, in 2008 that turned out not to be true. More recently, as volatility in the widely watched S&P 500 settled down to historic lows this year, investors believed that the magic of low volatility was here to stay. Central banks--through their periodic interventions when markets began to fall--had somehow engineered a no-lose situation for investors. It was going to be clear sailing ahead for...well, forever if you listen to Wall Street.

The history of volatility in markets and in life suggests that high volatility lies just around the bend after a prolonged period of low volatility. It is impossible to say what would trigger the kind of crash we saw in 2008. For now, the Chinese stock market crash and recent negative economic news in China and the United States have unnerved many investors. The Chinese stock market is now more than halfway to a 2008-style meltdown. Stocks in Europe and the United States have finally started to fall in earnest after holding up and even advancing in the face of major declines in emerging markets such as Brazil, Indonesia, Malaysia, and Turkey. Money rushed from the emerging markets to major developed economies looking for--you guessed it--stability.

Sunday, August 16, 2015

What is the price of oil telling us?

Market fundamentalists tell us that prices convey information. Yet, while our barbers and hairdressers might be able to give us an extended account of why their prices have changed in the last few years, commodities such as oil--which reached a six-year low last week--stand mute. To fill that silence, many people are only too eager to speak for oil. And, they have been speaking volumes. So much information in that one price!

First, as prices fell last year when OPEC refused to cut its oil production in the face of slowing world demand, the industry kept saying that it could continue to produce from American tight oil fields at around $80 a barrel and be profitable. Then, as prices fell further, the industry and its consultants assured everyone that while growth in tight oil production would slow, it would still be profitable for the vast majority of wells planned.

Petroleum geologist and consultant Art Berman is probably the best representative from the skeptical camp. For many years Berman has been pointing to the high cost of getting fracked oil out of the ground. And, those costs led to negative free cash flow for most tight oil operators for several years in a row--that is, they spent considerably more cash than they took in, making up the balance with debt and stock issuance. Not surprisingly, the operators took that money and kept drilling as fast as they could.

Sunday, August 09, 2015

The future isn't what it used to be

Two recent films couldn't be more at odds in their vision of the future. Mad Max: Fury Road is the long-awaited continuation of the Mad Max movie series. The movie is essentially a relentless chase scene set in a world burned to desert by climate change and bereft of civilization which has long since vanished in a haze of war and resource shortages.

(Spoiler alert: In this piece I discuss many events at the end of each film. For Mad Max fans this should make no difference in their enjoyment of the long and injurious chase scenes that are the meat of the film. I do not see how the confusing concatenation of nonsequiters that make up Tomorrowland could be ruined by my commentary. But, those who want to see the film without knowing the end should read no further--until they return from a showing.)

In Disney's Tomorrowland something's gone wrong in the mysterious Platonic dimension of forms called Tomorrowland which communicates with and influences the real world of today. Hugh Laurie plays the ruler of Tomorrowland. He laments that he has been sending messages to the real world for years about all the stupid things people are doing: wasting resources, changing the climate, polluting the planet, engaging in senseless wars. But almost no one seems to be listening. For those few who are, all they do is talk about the negative without offering any solutions.

Sunday, August 02, 2015

Energy, the repressed: Paging Dr. Freud

Jeremy Rifkin announced the end of work in a book by that title in 1995. Today, we are once again being told that the end of work is nigh. The Atlantic Monthly tells us so in a piece entitled, "A World Without Work." Automation and computer technology will bring unimaginable change and prosperity--and result in the loss of millions of jobs that will not be replaced.

I heard this before when I was young. In the 1960s there was talk of a three-day workweek for similar reasons. Obviously, it didn't work out.

My purpose here is not to provide a detailed critique of such prognostications. Rather, I ask the same question I ask when I see a science-fiction film depicting widespread space travel and planetary colonization. Where are they getting all the energy to do these things?