Oh These Senate Hearings
It seems that Alan Greenspan finally opened his long awaited economic consultancy firm, Greenspan Associates LLC. This means that he will remain in and around the financial circles. Meanwhile, he will soon finish his book which will surely become a best seller in a short time, not because of the quality of the arguments but because the author is Greenspan.
He was up again on the news. He testified before the US the Senate Foreign Relations Committee on June 7, 2006. The subject of the hearing was “Oil Dependence and Economic Risk.”
His testimony (not the complete testimony though) was rather unusual. I mean, it was understandable and contained straight statements.
American households, he says, “are struggling with rising gasoline prices.” Compared to whom and compared to what Mr. Greenspan? Gasoline prices in Europe and in many developing countries are double the price in the US. For example in Turkey, it is more than double even though income per capita is only 20% of average income in the US. Wining and dining persists.
I am tired of hearing stories about excess capacity. Greenspan admits that “Just how much excess capacity, and of what quality oil, is a matter of debate” but he insists that it is one of the factors to be blamed on for the high oil prices.
Why the heck oil producing countries should spend billions of dollars in order to create idle capacity? In fact OPEC should make an announcement calling for International Oil Companies. OPEC should say “OK. We open up some areas for exploration and development. You are most welcome. But beware that you will be allowed to produce only when we really need that extra capacity” I wonder which oil company would agree on that. Oh, no, not us, but OPEC should do it. If we do that we have to extract oil and sell.
Moreover, I still do not understand why OPEC needs international oil companies and why western politicians still think that OPEC countries are full of useless people. Greenspan says that OPEC and other nations “have rebuffed offers by international oil companies to help tap their reserves.” OPEC countries have money. If they wanted they would have called service companies, have hired best people and do that by themselves.
However, he is completely right with the fact that there has been a major upsurge in over-the-counter trading of oil futures and other commodity derivatives in the past several years. But he is wrong with the reason. He says that since world was not investing “enough to expand crude-oil production capacity quickly enough to meet rising demand, increasing numbers of hedge funds and other institutional investors began bidding for oil. They accumulated it in substantial net long positions in crude oil futures, largely in the over-the-counter market.”
“The extent of the surge in participation by financial institutions in claims on real barrels of oil is reflected in the near tripling of the notional value of commodity derivatives,” he adds. Somebody should tell Mr. Greenspan that futures contracts are paper barrels not real barrels as he claims. Most of the trading on futures markets is speculative, with very few contract traders seeking actual delivery of actual oil at the end of the month when contracts settle.
Then he became ridiculous with a completely stupid claim: “Hypothetically, if we still had the 10 million barrels a day of spare capacity that existed two decades ago, neither surges in demand nor temporary shutdowns of output from violence, hurricanes or unscheduled maintenance would be having much, if any, impact on price.”
To his logic, not enough spare capacity motivated investors to claim more real (?) barrels in futures markets and pushed the prices up. No wonder he was FED chairman. (see my previous blog on speculators)
Mr. Greenspan openly attacked OPEC as well. In OPEC countries, he claims, much oil revenue “has been diverted to meet the perceived high-priority needs of rapidly growing populations. Unless those policies, political institutions, and attitudes change, it is difficult to envision a rate of reinvestment by these economies adequate to meet rising world oil demand.” Watch the word “perceived.” What does he mean really? OPEC countries are so stupid that they invest money in the wrong places?
Mr. Greenspan admits that inadequacy of world refining capacity has become worrisome and we points out the facts that we consume more than we find: “despite improved technology and high prices, additions to proved reserves in the developed world have not kept pace with production; so those reserves are being depleted.”
As Mr. Greenspan summarizes oil pricing power was firmly in the hands of Americans. Specifically in the hands of the Standard Oil monopoly until it broke up in 1911, then oil companies and the Texas Railroad Commission, which basically doing what OPEC tries to do - raise limits on output to suppress price spikes and cut output to prevent sharp price declines.
“American oil’s historical role ended in 1971, when rising world demand finally exceeded the excess crude oil capacity of the United States. At that point, the marginal pricing of oil abruptly shifted—at first to a few large Middle East producers and later to market forces broader than they, or anyone, can contain,” he continued.
A typical Greenspan sentence. He meant that the US oil production peaked.
Then he is proud that the US became less oil intensive, because the ratio of oil consumption to GDP fell by half since 1973. He is probably not aware of the fact that energy/GDP ratio, which is called energy intensity, by itself is a meaningless concept. He should make a small search in Energy Policy journal and should look at articles there explaining why it is the case. A meaningful way to analyze the trends is to decompose the intensity into components.
The US became less oil intensive (as a share of GDP) because almost no oil intensive manufacturing sector is left in the country. Note also that 71% of the US GDP is household consumption expenditures.
Concerning the impact of oil prices on economy, he still tries to be cautious. “To date, it is difficult to find serious erosion in world economic activity as a consequence of sharply higher oil prices. Indeed, we have just experienced one of the strongest global economic expansions since the end of World War II,” he says.
Then he adds “The U.S. economy has been able to absorb the huge impact of rising oil prices with little consequence to date because it has become far more flexible over the past three decades owing to deregulation and globalization.”
I will elaborate this issue in a bit.
The last paragraph in Greenspan’s testimony is very catchy: “Corn ethanol, though valuable, can play only a limited role, because its ability to displace gasoline is modest at best. But cellulosic ethanol, should it fulfill its promise, would help to wean us of our petroleum dependence, as could clean coal and nuclear power. With those developments, oil in the years ahead will remain an important element of our energy future, but it need no longer be the dominant player.”
No, Mr. Greenspan. First you cannot run the current vehicle fleet with Nuclear. Second, when you come down to the Earth where I live, you will see that oil will become even more dominant player!
Although not much talked John Podesta, president of The Center for American Progress, also submitted his testimony to the same hearing.
He basically claims that rising oil prices, uncertainty in the market and dependency to imports will not change “without an aggressive policy response that promotes both radically increased energy efficiency in our vehicle fleet and a rapid shift to greater use of alternative renewable fuels.” What else you would expect from center for American Progress?
Every body talks about vehicle efficiency in the US but as he correctly identifies “the efficiency of our vehicles is moving in the wrong direction. In 1987, the average fuel economy of U.S. auto and light truck fleet was 26 mpg; in 2004, that number had fallen to 25 mpg.”
According to Mr. Podesta “Global demand is outpacing supply and refining capacity, creating a tight market that leaves us and our allies increasingly vulnerable to disruptions in energy supplies from unstable and sometimes hostile countries (which adds a further premium to prices).”
And to him, the US has a holy mission: “The defense of the global oil infrastructure is another cost born in large part by the United States. Around the world, the U.S. military is charged with protecting pipelines, refineries, and strategic sea lanes from terrorist or insurgent attack. The Department of Defense has stepped up its arms deliveries and training to forces in Angola and Nigeria.”
What he doesn’t say is a) who charged the US with protecting the oil facilities? b) why the US blames those countries with spending their budget on arms?
Even though it has relatively good structure, the testimony is a masterpiece on the statistical illiteracy and misuse of statistics.
Here is some of his alarming statistics, based on his logic, with my comments:
“Yet America’s dependence on imported oil has grown steadily since 1972, when domestic output reached its peak of 11.6 million barrels per day. Domestic production is now nine million barrels per day and declining.”
“Today 66 percent of oil consumed in the United States comes from foreign sources, up from 58 percent in 2000, with about 20 percent of those imports coming from the volatile Persian Gulf region.“
Really? Check out the EIA publications carefully Mr. Podesta! Keep in mind that Persian Gulf is a part of Middle East.
“Rising energy costs are also highly regressive. Working families — who spend the largest share of their income on transportation and energy — are hit the hardest.”
Based on what? Oh yes, some shaky surveys. What is the definition of working families?
“In much of the developing world, meanwhile, reliance on oil has already been devastating. The International Energy Agency (IEA) estimates that for every $10 hike in the cost of a barrel of crude, the economy of an oil importing country in sub-Saharan Africa is impacted more than 10 times as much as the United States.”
First of all, soliciting Ethiopia to prove the claim (he does in the testimony) is a dirty World Bank trick. Second, the IEA study is proved to be wrong and misstated. See my comments on that study.
“The resulting squeeze on struggling developing world budgets can lead to serious consequences with international repercussions.”
The statistics of the IMF and World Bank for the year 2004 and 2005 do not say so!
Anne Krueger, First Deputy managing Director for the IMF said on Feb 11, 2005 that “2004 was the best year for global GDP growth in decades” Global trade has also recovered strongly since the downturn in 2001, and continues to be an important engine of growth. There has also, in recent years, been a sharp fall in inflation worldwide”
In its Asian Development Outlook, the Asian Development Bank said GDP growth for developing Asia averaged 7.3%, the fast growth rate since the Asian financial crisis of 1997/8. This happened on April 6, 05.
“Improved growth in 2004 had been almost universal and unusually widespread across developing regions” United Nations said in its publication called The World Economic Situation and Prospects.
“ so far, the effects of higher oil prices on global growth and inflation have been manageable, partly because higher oil prices owe much to strong global demand, and partly because of the improved anti-inflationary credibility of central banks” IMF managing director Rodrigo Rato , Reutres, april 6, 2005. “ Update 2 sharp oil price rises threaten growth – IMF’s rato”
Want more recent?
In its latest semi-annual World Economic Outlook report released in April 2006 the IMF said that the growth of global gross domestic products is estimated at 4.9 percent in 2006, 0.6 percentage point higher than projected in the last IMF meeting held in September 2005.
Then check May 2006 Economic Outlook of the OECD and see how OECD countries performed and are expected to perform.
Finally, according to him “Over time, ending our oil dependence will mean a stronger economy, more jobs, healthier communities, greater innovation, and a more efficient and productive workforce.”
No more comments your honor!
It is really bizarre that there is no talk about bringing US gasoline prices to world levels. Also no mention of oil conservation, peak oil, the adventures of the US abroad, the dying dollar, liquidity boom etc.
I do not understand what the meaning of those hearings are if the testimonies can be summarized in one sentence: “Nothing new in the West”