Carried Away

I Was Wrong About Oil, At Least In Small Part

Never did I expect that the price of oil would increase to $100+/bbl, but here we are right now at $106.40/bbl for April '08 light crude.  However, I was correct in thinking that the world would soldier on despite the oil price.  The U.S. economy is in or near recession not because of the price of oil, but because of the bursting of the housing bubble.  There are no oil shortages.  There is no crisis.  The market is working just fine.  It would be fine at $150/bbl.  It would be fine at $200/bbl.

The price is forcing work on substitutes for oil.  Within a decade, we could end up using electricity for most of our individual transportation needs.  The technology is mature enough to make the switch and it wouldn't inconvenience anybody except in the rare situation.  Maybe the price of oil would need to be higher in order to force the substitution, given that gasoline and diesel are strong products.  Of course, oil is used for very many other things -- its use permeates our economy -- but I am sure that there are substitutes in most of those markets as well.

Jack Field and Peak Oil

Last week, Chevron/Statoil ASA/Devon announced that the Jack field in the Gulf of Mexico was successfully tapped.  The test well is flowing at the maximum 6,000 bbl/day rate.  The oil is light and sweet.  Initial speculation is that the untapped fields around Jack have economically recoverable reserves of 3 billion to 15 billion barrels.  The field is about 270 miles southwest of New Orleans, about 170 miles off the coast.  It will take 4 or 5 years to fully develop the field.

The first thing to note is that this well is very deep by U.S. standards.  The sea floor is at 7,000 feet and the well is drilled 21,000 feet below that, for a total of 28,000 feet.  Also, the well operates at 15,000 to 20,000 lbs. of pressure.  By comparison, a Clinton sand stripper well in Ohio -- where my dad produces oil -- normally totals roughly 2,500 - 3,500 feet and is under a couple hundred lbs. of pressure.  MIT Technology Review has a nice rundown of the technology used for the Jack well.  Suffice it to say that these drilling technologies are rather new and the scale and logistics of operating under these conditions are much different than that with which I am familiar personally.  Very impressive.

Business Week has a good commentary that points out what this find indicates for the argument for peak oil.

But the capability to find and recover petroleum at extreme depths, temperatures, and pressures, as demonstrated by the Chevron team, may indeed tip the balance of supply and demand in the long term. There will be a new frenzy of drilling at these depths in the Gulf of Mexico, where about a dozen promising exploration wells have already been drilled.

...

Other parts of the world that once appeared beyond the pale may also come into play. Areas believed to have oil deposits extremely deep beneath the ocean floor, which could now become commercially recoverable, include the North Sea off the coast of Britain, the Nile River Delta off the coast of Egypt, and possibly coastal Brazil, says Andrew Latham, a vice-president at energy consultancy Wood Mackenzie in Edinburgh, Scotland. Other analysts say West Africa could harbor lots of ultra-deep deposits. The areas have produced oil before but never from these depths.

...

But given the powerful combination of high oil prices and new technology, the industry is gaining confidence that supplies will grow. It's pushing hard to produce oil and gas from difficult tar sand and shale fields as well as rejuvenating older fields with enhanced recovery methods. Cambridge Energy Research Associates predicts world oil and natural gas liquids capacity could increase as much as 25% by 2015. Says Robert W. Esser, a director of CERA: "Peak Oil theory is garbage as far as we're concerned."

By the way, CERA's chairman is Daniel Yergin, the author of The Prize, the authoritative history of the oil industry.  I have a lot of respect for what CERA has to say.

As some of you know, on August 31, 2004, my brother bet me $1,000 that oil production would peak in the next 10 years.  I try not to make stupid bets and am sanguine that he will have to pay up. :-)

Warren Buffett Gives Away His Billions

Warren Buffett, the 2nd richest man in the world, is giving away his fortune, most -- $30 billion -- to the Bill & Melinda Gates Foundation.  As many of you know, Buffett is a disciple of the Benjamin Graham, a hero of mine and a mid-20th century professor of investing at Columbia University.

I am happy that most of his money will be going to the Gates Foundation rather than the Susan Buffett Foundation, which focuses more on pro-choice issues and gives lots of money to institutions like Planned Parenthood.  The Gateses seem to care about population growth, but are attempting to solve it by alleviating poverty and disease -- a much more progressive approarch.

Charlie Rose had a good hour-long interview last evening with the Gateses and Buffett.  It is available on Google Video for $0.99.  There's lots of substance in the interview, including the reasons why he's giving the money away rather than giving it to his children.

What Have They Done with the Real Google?

Google Blogoscoped shows a simple test to demonstrate how evil the new google.censored service is.  Here's an images.google.com query for "tiananmen" and here's an images.google.censored version of the same query.

This whole issue sticks in my craw badly.  I'll have much more to say about this some other time.

(Hat tip to Danny Sullivan at Search Engine Watch.)

Electric-gasoline hybrids gaining critical mass

In the past, I wondered whether electric-gasoline hybrid vehicles would ever gain critical mass.  However, as a Christian Science Monitor article points out, the car companies expect to sell some 200,000 hybrid vehicles this year.  This seems like critical mass.

It occurs to me that electric-gasoline hybrids are starting to make economic sense.  The hybrid add-on costs some $3,000 for cars, trucks, and SUVs -- a 1,500 gallon break-even point at $2/gallon.

In addition, the Christian Science Monitor article talks of the move to "plug-in hybrids," which have a battery that you can use for relatively short trips.  Plug in your car to the wall socket and the first 10 miles at 35 miles per hour is from your electrical grid rather than from gasoline.

Taken together, the move toward higher fuel efficiency and the move toward grid electrical power as opposed to gasoline seems to make economic sense.  But there are other reasons to buy plug-in hybrids.  I'm not much of a believer in the environmental benefits of the hybrids, but I can easily see the geopolitical benefits.   Venezuela, the Middle East, and Russia are all potential hot spots.

Be Careful What You Vote For

Today, in response to fears about the Congress Party's economic policies, the Indian stock market crashed.  The Sensex index was down 11% after two trading suspensions.  This is in addition to a 6% fall on Friday.

This fall really shouldn't surprise anyone.  It is a rational investor response.  As discussed in the past, stock prices are merely the Net Present Value of a future profit stream, discounted appropriately.  The value is directly tied to economic growth.  It's the same in India and the United States or any other country.  The Congress Party government should follow the wishes of its voters and put in policies that moderate growth in favor of more equitable economic distribution.  The downside for the voters is that your stock market will crash.

Foreign investors and speculators are being blamed for the crash, but to me that's like blaming somebody for acting rationally.

Congress Upsets BJP In Indian Elections

Here's a real stunner.  The BJP, which has been the lead party in the governing coalition of India, has been upset by the Congress Party.  This happened despite the fact that in the first quarter of this year, India's economy grew at a real 10% annualized rate, and under BJP care for some time, the economy has grown consistently in the real 7-8% range.

India has a slightly lower Gini score than the United States -- i.e., India's income is distributed more equally than is America's.  Given this, I expected that India would reward her politicians in about the same manner as Americans would.  For instance, in 1984, economic growth was a real 7.2% and Reagan won reelection by a landslide with 59% of the vote.  In 1955, economic growth was a real 7.1% and in 1956 Eisenhower won reelection by a landslide with 58% of the vote.  In 1935 and 1936, economic growth a real 8.9% and 13.0%, repsectively, and in 1936, Roosevelt won reelection by a landslide with 61% of the vote.

You might bring up the possibility that since India has such a large amount of poverty -- 25% of the population is below the poverty line -- voters felt that the money wasn't being spread evenly enough.  This might be true, but the U.S. response to this was entirely different.  Roosevelt was in the same or worse situation with regard to poverty and he still won by a landslide.  Maybe he just communicated better with the American people than the BJP did with the Indian people?

I guess this stark difference demonstrates that each country's voters weight their public values differently.  I hope that the Congress party doesn't force India to lurch back to its socialist roots, killing the economic progress that has been made by India in the last decade.  India's politicians must listen to the wishes of the people, and the people seem to have expressed the opinion that economic growth is not of primary importance.

The Health of U.S. Research and Development

R&D spending is a recurring theme in the international foot race, so I have found it interesting to look at where we stand in this regard. The National Science Foundation (NSF) tracks private and public R&D spending on an annual basis (the latest figures being 2002 preliminary). For 1953 through 2002, I have plotted spending against our economy, as measured by the Gross Domestic Product (NIPA Table 1.1).

Overall, it is clear that industry-funded R&D has grown in importance, while government-funded R&D has declined in importance. With regard to government-funded R&D, there were a couple of non-recurring drivers over the last 50 years. As discussed in a previous post, the Apollo program represented a huge R&D effort for our country, and was done concurrently with the Cold War R&D build-up. The other driver was the defense R&D build-up of the Reagan administration. On the whole nowadays, defense-related R&D represents about 70% of all government-funded R&D, or about 0.4% of the economy.

Here is a look at the amounts spent by other countries, as compiled and charted by the NSF. Since 1999, the year listed for the US, R&D has increased from 2.63% to 2.79% of the economy.

No other countries besides the US and Israel spend much on defense R&D, so when making comparisons, subtract about 0.4 percentage points from the US total. Subtracting defense, the relevant comparison would be 3% of GDP for Japan, 2.4% for the US, and 1.8% for the EU. Here is a somewhat dated NSF plot of 20 years of R&D spending as a percentage of the G8 economies.

One of the interesting divergences is among EU countries. Germany has been increasing its R&D spending as a percentage of GDP impressively over the last several years, while spending in France and the UK has declined. I have a pretty good idea why this is so, which I will discuss in another post in the future.

Notes and Sources: Please see the underlying spreadsheet for all of these calculations. I note that there are two other categories of funding tracked in addition to those that I plotted: (1) Universities and colleges; and (2) non-profit organizations. These funding categories are minimal for our purposes here--a combined $15 billion in 2002. All 2001 and 2002 funding figures are preliminary.