Unnatural Forces

03/23/11 Buenos Aires, Argentina – To every cause, an effect. To every action, a reaction. To every well-meaning, do-gooder, interventionalist policy, a broken heart and an empty pocket. Such are the rules of life, Fellow Reckoner. It’s no use arguing with them. They are what they are, and for good reason. Bad behavior is discouraged by undesirable consequences. Dishonesty, for example, results in mistrust. And one can’t very well get along in life without trust. But imagine for a moment. Just imagine…

…imagine for a second that you were impervious to this inconvenient collection of celestial algorithms. Imagine that the rules did not apply to you, in other words…that you were somehow immune to, or removed from, the objective laws of reality, such as they are. Imagine that you could go out every night, party as long as you wanted, drink as much as you cared to and sleep with whomever took your fancy. (Remember, we’re just imagining here.) And now, suppose for an instant that there were no negative consequences. None. Zero. There was no hangover. No jilted wife (or husband) and no guilty conscience. No discouraging affects whatsoever; nothing to tell you that you were a bad boy (or girl).

Welcome to the fanciful “reality” as experienced by the world’s governments, where idiotic actions result in reelections and signals are so far removed from actuality that up is commonly mistaken for down and black for white. This is a world where deficit spending – that is, forking out more cash than is actually in your possession at any one time – is thought of as a prudent path to prosperity and where statistics are so routinely tortured as to barely resemble any recognizable definition. This is a “reality” where marching off to indefinable, unwinnable wars in far off lands, at the cost of tens of thousands of young lives, inspires not disgust, shame and embarrassment, but pride, patriotism and chest-beating camaraderie. It is a “reality” where naturally free men and women voluntarily elect “leaders”…as if there existed some gap in their lives where self respect and determination ought to be. It is a “reality” in which the weak are promoted at the expense of the strong and where anything that can go wrong almost certainly will.

This “reality,” as experienced by any and all governments, is, unfortunately, less surprising an occurrence than we might freely have hoped for. In fact, it is as inevitable as it is undesirable. Permit us to explain. Better still, permit us to cite the work of Morris and Linda Tannehill. This, from their indispensable book The Market for Liberty:

“…government is an extra market institution – it’s purpose is not to make profits but to gain power and exercise it. Government officials have no profit and loss data. Even if they wanted to satisfy their forced ‘customers,’ they have no reliable ‘error signal’ to guide their decisions. Aside from sporadic mail from the small minority of his constituents who are politically conscious, the only ‘error signal’ a politician gets is the outcome of his re-election bids. One small bit of data every two to six years! And, even this tidbit is hardly a clear signal, since individual voters may have voted the way they did because they liked the candidate’s sexy appearance or fatherly image. Appointed bureaucrats and judges, of course, don’t even get this one small and usually confusing data signal; they have to operate completely in the dark.”

Given that governments are both motivated by a perverse goal – power, not profit – and driven by individuals who, necessarily, are inspired by force rather than voluntary exchange, it is little wonder that nations periodically undergo sea changes in the form of revolutions, civil wars and social and political upheaval. Left unchecked, all governments inevitably descend into pure sin. Even the most lethargic, apathetic citizenry is likely to stand up and declare that “enough is enough” eventually. The only surprising thing is that it doesn’t happen with more frequency and to more welcome cheers.

So what is the solution? Does one even exist? Happily for us, truths tend, by their very nature, to be more apparent than we generally give them credit for. Truths don’t require construction, in other words; only that we destruct myth to see them more clearly. Perhaps the most common, insidious rumor that the government has managed to perpetuate is the lie that it is, itself, necessary at all. We are all familiar with the phrase “necessary evil,” for example. Voters are said to select between the “best of a bad bunch” or the “lesser of two evils.” And, we humans are commonly heard to say that the only two certainties in life are “death and taxes,” or, in other words, our own expiration date and the theft and coercion we must be subjected to until it comes due.

Such a defeatist way of thinking is, obviously or not, utterly absurd. Why be party to evil at all? Why choose the least rotten apple on the tree when there is a whole orchard waiting to be picked? Why, since we so vehemently abhor coercion in our personal lives, in our day-to-day, voluntary dealings with one and other, should we permit, enable and validate it in our “political” lives? Surely there is a better way, no?

Continue the Tannehills, with a none-too-subtle clue:

“…the big advantage of any action of the free market is that errors and injustices are self-correcting. Because competition creates a need for excellence on the part of each business, a free-market institution must correct its errors in order to survive. Government, on the other hand, survives not by excellence but by coersion; so an error or flaw in a governmental institution can (and usually will) perpetuate itself almost indefinitely, with its errors being “corrected” by further errors. Private enterprise must, therefore, always be superior to government in any field.”

Joel Bowman
for The Daily Reckoning

Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

View articles by Joel Bowman

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

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View the original article here

Unnatural Forces

03/23/11 Buenos Aires, Argentina – To every cause, an effect. To every action, a reaction. To every well-meaning, do-gooder, interventionalist policy, a broken heart and an empty pocket. Such are the rules of life, Fellow Reckoner. It’s no use arguing with them. They are what they are, and for good reason. Bad behavior is discouraged by undesirable consequences. Dishonesty, for example, results in mistrust. And one can’t very well get along in life without trust. But imagine for a moment. Just imagine…

…imagine for a second that you were impervious to this inconvenient collection of celestial algorithms. Imagine that the rules did not apply to you, in other words…that you were somehow immune to, or removed from, the objective laws of reality, such as they are. Imagine that you could go out every night, party as long as you wanted, drink as much as you cared to and sleep with whomever took your fancy. (Remember, we’re just imagining here.) And now, suppose for an instant that there were no negative consequences. None. Zero. There was no hangover. No jilted wife (or husband) and no guilty conscience. No discouraging affects whatsoever; nothing to tell you that you were a bad boy (or girl).

Welcome to the fanciful “reality” as experienced by the world’s governments, where idiotic actions result in reelections and signals are so far removed from actuality that up is commonly mistaken for down and black for white. This is a world where deficit spending – that is, forking out more cash than is actually in your possession at any one time – is thought of as a prudent path to prosperity and where statistics are so routinely tortured as to barely resemble any recognizable definition. This is a “reality” where marching off to indefinable, unwinnable wars in far off lands, at the cost of tens of thousands of young lives, inspires not disgust, shame and embarrassment, but pride, patriotism and chest-beating camaraderie. It is a “reality” where naturally free men and women voluntarily elect “leaders”…as if there existed some gap in their lives where self respect and determination ought to be. It is a “reality” in which the weak are promoted at the expense of the strong and where anything that can go wrong almost certainly will.

This “reality,” as experienced by any and all governments, is, unfortunately, less surprising an occurrence than we might freely have hoped for. In fact, it is as inevitable as it is undesirable. Permit us to explain. Better still, permit us to cite the work of Morris and Linda Tannehill. This, from their indispensable book The Market for Liberty:

“…government is an extra market institution – it’s purpose is not to make profits but to gain power and exercise it. Government officials have no profit and loss data. Even if they wanted to satisfy their forced ‘customers,’ they have no reliable ‘error signal’ to guide their decisions. Aside from sporadic mail from the small minority of his constituents who are politically conscious, the only ‘error signal’ a politician gets is the outcome of his re-election bids. One small bit of data every two to six years! And, even this tidbit is hardly a clear signal, since individual voters may have voted the way they did because they liked the candidate’s sexy appearance or fatherly image. Appointed bureaucrats and judges, of course, don’t even get this one small and usually confusing data signal; they have to operate completely in the dark.”

Given that governments are both motivated by a perverse goal – power, not profit – and driven by individuals who, necessarily, are inspired by force rather than voluntary exchange, it is little wonder that nations periodically undergo sea changes in the form of revolutions, civil wars and social and political upheaval. Left unchecked, all governments inevitably descend into pure sin. Even the most lethargic, apathetic citizenry is likely to stand up and declare that “enough is enough” eventually. The only surprising thing is that it doesn’t happen with more frequency and to more welcome cheers.

So what is the solution? Does one even exist? Happily for us, truths tend, by their very nature, to be more apparent than we generally give them credit for. Truths don’t require construction, in other words; only that we destruct myth to see them more clearly. Perhaps the most common, insidious rumor that the government has managed to perpetuate is the lie that it is, itself, necessary at all. We are all familiar with the phrase “necessary evil,” for example. Voters are said to select between the “best of a bad bunch” or the “lesser of two evils.” And, we humans are commonly heard to say that the only two certainties in life are “death and taxes,” or, in other words, our own expiration date and the theft and coercion we must be subjected to until it comes due.

Such a defeatist way of thinking is, obviously or not, utterly absurd. Why be party to evil at all? Why choose the least rotten apple on the tree when there is a whole orchard waiting to be picked? Why, since we so vehemently abhor coercion in our personal lives, in our day-to-day, voluntary dealings with one and other, should we permit, enable and validate it in our “political” lives? Surely there is a better way, no?

Continue the Tannehills, with a none-too-subtle clue:

“…the big advantage of any action of the free market is that errors and injustices are self-correcting. Because competition creates a need for excellence on the part of each business, a free-market institution must correct its errors in order to survive. Government, on the other hand, survives not by excellence but by coersion; so an error or flaw in a governmental institution can (and usually will) perpetuate itself almost indefinitely, with its errors being “corrected” by further errors. Private enterprise must, therefore, always be superior to government in any field.”

Joel Bowman
for The Daily Reckoning

Joel Bowman is managing editor of The Daily Reckoning. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

View articles by Joel Bowman

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

We Will Not Share Your Email.
We Value Your Privacy.

View the original article here

Disasters… Both Natural and Unnatural

03/14/11 Pittsburgh, Pennsylvania – Looking at history, there are often major international economic declines after big natural disasters. The example I like is how the San Francisco earthquake of 1906 led to the bankruptcy of many insurance carriers and to an outflow of cash from London and New York money centers. This led directly to the Panic of 1907 – and eventually to the creation of the US Federal Reserve. So in a sense, you could say that a natural disaster produced an unnatural disaster.

Getting back to the present, the earthquake-induced drop in oil prices is just a short-term blip. Oil prices are on the way up because many nations are increasing not just demand, but oil stockpiles – due to uncertainty of supply from the Middle East.

In the Philippines, for example, the government recently required that refiners keep a 90-day oil supply, versus, the former 30-day supply. Other countries and large oil-using firms are doing similar things, in terms of building stockpiles.

So which news trumps the other news? Will generally rising oil demand keep pricing strong? Or will unexpected events continue to keep a lid on that oil demand, and thus hold down prices?

Bottom line is that this earthquake oil-selloff is likely a short-term phenomenon. There’s strong upward momentum built into oil prices due to fundamental supply issues, not the least of which relate back to political unrest in the Middle East. We could see a quick rebound in oil price strength due to concerns over supply.

Looking further ahead, China only has enough oil in its strategic reserves to cover one month’s consumption, according to Wang Qingyun, head of the State Bureau of Material Reserves. Mr. Wang says China is working towards building a 90-day reserve, but the energy bureaucrats are still working on selecting the storage locations and constructing facilities.

Oil availability and pricing is certainly a matter of growing concern for China, whose daily oil imports, as a fraction of total consumption, now exceed that of the US. China now imports about 63% of its daily oil consumption – double the percentage of ten years ago.

As China’s consumption grows, the prospect of “permanently high” oil prices also grows. And that will mean investment dollars will continue pouring into the oil exploration industry.

For example, in the past five years we’ve seen (net) about 100 new jack-up and deep-water drill ships float away from the shipyards of the world. These vessels reflect over $40 billion of new capital expenditure. Then there’s the multiplier effect of new-build vessels on the vendors, equipment builders, steel mills and all the way back to the iron mines.

Meanwhile, a hiring craze is on at Halliburton (NYSE:HAL), which has just announced that it will hire about 5,000 new geologists and engineers, worldwide. Heck, even I – your humble editor – routinely field calls from headhunters, seeking geological talent.

It all sounds like positive investment news for the oil industry. But there are other things to consider as well. What’s the payback for all of this investment and hiring? Are we seeing an “energy return” for all the new capital outlay?

Let’s compare some recent numbers. Between 1995 and 2004, the global oil industry spent $2.4 trillion on various capital expenditures. This $2.4 trillion helped increase crude oil production by 12.3 million barrels per day, to about 85 million barrels of output per day by 2005 (and hold that thought). This is just the raw, historical data set.

Coincidentally, between 2005 and 2010, the world oil industry spent another $2.4 trillion on capital expenditure. Yet for the same amount of money – $2.4 trillion – global crude oil production actually fell by about half of one percent.

What does this mean?

There are many implications, of course, but one key point is that the world’s overall daily oil supply is not growing. For all the stories you see about “new” supply coming online from deep-water fields, from onshore discoveries, from enhanced oil recovery, from oil sands, from gas liquids out of tight gas deposits, etc., these are only replacing other oil supplies that are vanishing in the form of depletion.

It’s fair to say that oil output is flat, worldwide, and prices are not really being set or moderated by efficiency, conservation or even by adding capacity.

No, the key control over oil prices in the past couple of years has been the recession. The recession has set the price of oil. And had it not been for the recession, the world might be consuming upwards of 93 million barrels of oil per day…and might be paying much higher prices than $100 a barrel.

Looking ahead, wherever things go with the world economy, we’re in an environment that’s supply-constrained. We’re not going to find any “new” Saudi Arabias or Russias – although it’s good to know the story of what’s happening off shore Brazil.

Peak Oil is here, except right now we’re experiencing it solely as an issue of affordability ($100-plus oil), versus lack of day-to-day supply.

Eventually – well, maybe – the world economy will begin to move out of recession. And maybe we’ll even have a period of time without international crises (Middle East comes to mind) or large-scale natural disasters. Then we’ll see what true supply constraint looks like – and prices will rocket upwards.

How does one deal with all of this? Well, begin by investing in companies that hold real assets in the form of oil and natural gas, as well as uranium and other resources of value – gold, silver, etc. That, and the energy-technology players of the oil service sector – the usual suspects of Schlumberger (NYSE:SLB), Baker Hughes (NYSE:BHI) and Halliburton.

Stay tuned and we’ll figure it out together.

Regards,

Byron King,
for The Daily Reckoning

Byron received his Juris Doctor from the University of Pittsburgh School of Law, was a cum laude graduate of Harvard University, served on the staff of the Chief of Naval Operations and as a field historian with the Navy. Our resident energy and oil expert, Byron is the editor of Outstanding Investments and Energy and Scarcity Investor. Byron has made frequent appearances in mainstream media such as The Washington Post, MSN Money, Marketwatch.com, Fox Business News, CNBC's Squawk Box, Larry Kudlow, Glenn Beck and PBS Newshour. He also had a feature article written in the Financial Times, and has appeared on both CNN and Marketplace radio broadcasts. Byron has also been quoted in various international publications such as The Guardian and De Volkskrant, and has been a guest on Canada's CBC television broadcast.

View articles by Byron King

The articles and commentary featured on the Daily Reckoning are presented by Agora Financial.

Sign Up for The Daily Reckoning e-letter and receive a copy of our newest report How to Survive the Fall of Social Security… at NO CHARGE.

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We Value Your Privacy.

View the original article here