May 16 2012

Food Stamp Use Picks Up Again, In Los Angeles County

May 16, 2012

After a winter lull, food stamp participation in Los Angeles County picked up again in March, to rise to a new all time high of 1,036,078 persons. Other economic data points to weakness in the nation’s largest state economy, as well. Indeed, falling tax collections are largely behind the recent budget deficit blowout of 16 billion dollars. And to think: many thought the years of California’s “budget crisis” were behind us. | see: Los Angeles County SNAP Users vs. Price of Oil 2007-2012.

As always, included in the chart is the monthly price of oil for the obvious reason: car dependent Southern California remains uniquely and painfully exposed to oil prices. This cost of living input is a feature, and is embedded, in all aspects of the food stamp program. Mainly, because the household balance sheet of SNAP participants is splayed between food and energy costs. Food stamps partially offset the rising cost of gasoline.

–Gregor

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Author: Gregor Macdonald   Posted in: California   Tagged:            
May 12 2012

‘Cornucopians in Space’ Deliver a Dangerously Misguided Message

May 12, 2012

Dear Readers: I’m currently writing a long-form post twice a month now for Chris Martenson’s excellent website. Accordingly, I’ll be publishing the first (and free) part of these essays here at Gregor.us. Enjoy. — Gregor

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Once a year the very chic and exclusive TED conference takes place in Southern California, bringing together entrepreneurs, inventors, and thought leaders from every corner of the world.

There, gathered around a stage, a kind of hivemind begins to unfold in which the most cutting edge ideas in healthcare, energy, social development, and behavioral psychology are shared from a very plugged-in, big screen podium. It’s extremely well done.

And despite the reflexive criticism from outside the conference — that the gathering is inward looking and elitist — TED usually does manage to disturb the zeitgeist, a little, with its unveilings in technology and innovation. It is good, plainly so, that next step advances in solar technology, data collection, and developing world health initiatives are explained and broadcasted from TED. Especially given that policy makers, or those who have the ear of policy makers, are also often in attendance.

A better charge to level against the TED conference, however, is that it’s routinely if not unfailingly optimistic.

The 2009 conference, held in the aftermath of the global financial crisis, did not address the unpleasantness of that historic event in any meaningful way. Moreover, very few talks in recent years have addressed energy costs, and especially the price revolution in oil.

In some sense, TED is the techno-innovators’ version of the faith expressed by neo-liberal economics, in which the market solves nearly all of its own problems. The enduring posture at TED, therefore, is one that acknowledges serious world problems, ranging from war to famine, water and food availability, but which nearly always concludes that amazing and ingenious people – geniuses – are working to solve the problem. The Great Man theory of history would find each TED conference a comfortable place to be.

So it was perhaps surprising but also encouraging that the January 2012 TED conference finally addressed the subject of Collapse, by inviting Paul Gilding to give his talk The Earth is Full (opens to video).

I’d actually seen a version of Gilding’s talk at the Ilhahee Lecture Series here in Portland last fall. Gilding’s view is that we’ve reached a relationship between global population and available natural resources, that makes it inevitable that the economy—a converter of natural resources into goods—will sharply slow down, if it has not started to slow down already. Gilding can be thought of not as a neo-Malthusian, or a doomer, but rather as an ecological economist. (As most readers know, I share this same view.) Gilding looks at trailing historical growth rates — again, the rate at which natural resources are converted to industrial and population growth — and concludes that the future size of the economy at these growth rates would create a machine that the earth simply cannot sustain. Again, I agree.

But Gilding’s TED talk was countered, if you will, with a more typical and rousing plea from Peter Diamandis of the X Prize Foundation.

Diamandis, grounded heavily by a personal background in science and medicine, is not naive. His talk, Abundance is Our Future, was a laundry list of fast-moving technological innovations that have transformed poverty rates historically, and which promise to transform quality of life in the years ahead.

One of the most laudable, and humanistic beliefs, advanced by Diamandis is that the 3 billion people remaining to come online to the Internet and telecom networks represents a vast and underutilized supply of human thinking. As a previous educator myself, I find this argument to be powerful.

My quibble with Diamandis and his talk is that the magnitude of the world’s present challenges cannot wait for the array of potential solutions that may start to work at the margins of humanity, even despite his core belief that innovation and its impacts will actually start to speed up. After all, Diamandis is an adherent to technological singularity, the notion that exponential growth in technology will eventually reach a crescendo, thus offering humankind super-solutions at a kind of hyperspeed rate of change. (By the way, I don’t agree with this view.)

Diamandis would go on to further test my ability to follow his arguments, however, when he recently announced a team that will explore the possibility of mineral mining on moving asteroids. I’ve no doubt the public has reacted to this prospect as either impossible, or as another silly story about the grandiose dreams of tech millionaires.

I had a different reaction: why is Diamandis thinking about mineral mining in space, when resources here on Earth — in his view — are so abundant?

Blue Sky (Asteroid) Mining

Although here in America we tend to dumb down complex subjects into simple ‘Either-Or’ arguments, it was useful to hear the Gilding vs Diamandis debate at TED. In addition to their respective presentations, they had an onstage exchange which you can see here, hosted by Chris Anderson.

One of the major default lines between cornucopian technologists like Diamandis, and thinkers like Gilding, is the role that technology plays in the creation and extraction of resources. In ecological-economics, technology helps us extract resources. But, for folks like Diamandis, technology creates resources. It is both a distinction without a difference and also a distinction with a huge difference, depending on your perspective.

And the implications, depending on that difference, for the future price path of commodities, for inflation, for industrial growth are enormous.

Ask yourself the following. For the technologies which allowed for the increased rate of extraction of coal in the 19th century, or,  which now allow for the increased rate of extraction of natural gas from shale in the 21st century: did those technologies create the resources or merely extract them as they already existed? The answer seems rather obvious, doesn’t it? I mean, I want to be sympathetic to the view that technology creates resources, in the sense that technology makes previous unrecognized or unrecoverable resources available. But a threshold I cannot cross, however, is that idea that there are always a new resources waiting to be discovered, if we can only create a technology to obtain them.

Which brings us back to mining for minerals. On asteroids.

Why is Diamandis not pursuing technologies for material upgrading, for example? In material upgrading, the task is to substitute materials once thought inapplicable, for example, to the task of solar manufacturing or electricity transmission. If copper gets too expensive to use for electrical transmission, then some other metal, or combination of metals, or even liquids or gases are used. That’s the theory, anyway.

Why mount energy-intensive missions into space, and run heavy payloads back to earth? Surely the ROI (return on investment) to such efforts would be low, even if the minerals involved commanded a very high price….back on earth.

I think I have one answer to this question, but first, let’s review the business plan, the mission, of Planetary Resources, Inc. From the Los Angeles Times:

A group of 21st-century private space entrepreneurs is expected to unveil an ambitious new venture to mine the surface of near-Earth asteroids in search of precious metals and rare metallic elements. The plan may seem like it was torn from a science fiction novel, and critics say the idea may be far-fetched and difficult for a small company to accomplish. But the company, Planetary Resources Inc., has already drawn an A-list of investors and advisors. The backers include Google Inc. Chief Executive Larry Page and Chairman Eric Schmidt, “Avatar” director James Cameron and Microsoft Corp.’s former chief software architect Charles Simonyi….”Humanity has been driven for thousands of years to explore the Earth for resources,” said Peter H. Diamandis, the company’s co-founder and co-chairman. “The next step is to expand the economic sphere of humanity beyond Earth’s confines.”

You have to wonder: is it possible that the team behind Planetary Resources accepts that many crucial natural resources, necessary for mobile, greentech, and telecom development are–in truth neither replicable, nor substitutable, nor sufficiently recoverable here on our fair and blue planet?

The Abundance Movement

A flowering of new books, heralding a new age of abundance, have recently appeared, including one from Mr Diamandis.

However, it is worth noting this cultural theme comes after a decade in which the production rate of many natural resources, from oil to gold, to more recently copper, did not speed up but instead either slowed or stagnated in the face of quickly rising prices. Crude oil production has been trapped below a ceiling since 2005. Global production of gold actually fell every year of the past decade until the last two years, but is once again stagnating. Copper production managed to rise the past decade. However, ore grades of copper have been declining for a century, and this is why copper has now repriced at much higher levels, closer to $4.00 per pound. Recent data shows also that the rate of growth of global copper production in the last decade slowed significantly, and stagnated also in the past 24 months.

There’s an important distinction to make, therefore, between an Abundance movement that simply posits we’ll have more of everything, at cheaper prices, in the same style as the past, as opposed to an Abundance movement that is tethered to reality, and realizes that large changes in consumption, values, and lifestyle will be needed to create the next phase of “wealth.”

Authors such as Juliet Schor, who wrote Plentitude, are much more reflective of and respectful of limits, and therefore does not dream of the next phase of mineral mining in outer space. Rather, many “new wealth” thinkers have gravitated instead to a less is more pathway, in which a lot of our previous consumption and time-bankruptcy is finally recognized as waste.

Three Crucial Problems with the “More is More” Abundance Movement

Peter Thiel recently debated George Gilder at ISI (you can open the video at YouTube, here). Thiel made a familiar point, which is that the impact of technological progress has become more narrow. I have treated this issue in previous reports, and pointed to some of the data on which this thesis relies, including the stagnation of Total Factor Productivity, for example.

But Thiel goes on to make a second point which is that belief in rapid, even accelerating technological progress is surely going to cause tremendous mis-allocation of capital. And that’s the first crucial problem I see with the cornucopian abundance movement.

Like a financial system that refuses to accept that tightly coupled structures are risky, and that risk itself grows with in tandem with complexity, the cornucopian abundance approach simply won’t take no for an answer. That means instead of focusing on smaller solutions with more immediate effects, grandiose solutions with long timelines are pursued instead.

The second crucial problem is a failure to consider the limit outlined by Paul Gilding, which is that present growth rates of energy consumption, for example, imply an economy that just about everyone can agree is simply too large for the planet to handle. You simply cannot keep growing the size of the human-created heat engine up to the level of a star. This was articulated beautifully by physicist Tom Murphy in his recent and very wide read post Exponential Economist Meets Finite Physicist. When problem solvers entirely avoid the subject of limits it is both appealing, and exciting, but eventually it becomes vaguely pathological.

Finally, there are a number of pressing issues already on the planet, which range from the risk created when food production is outsourced by water-starved populations to other continents, to large regions of the world such as Asia attempting to provide increased electrified transport for billions of people. Leapfrog adoption of mobile telecom, and the rise of social networks will no doubt serve to get these emerging voices out to a world eager to learn, and to help with solutions. But celebrating the success of solutions before they’ve actually arrived, indeed well before they’ve arrived, is no solution at all.

Repricing the Planet: Real World Copper as Opposed to Metals in Space

In Part II: The Looming Dislocation Risks Posed By Resource Scarcity, we dive further into the challenges that accompany the acceleration of technology, which relate to de-industrialization and the displacement of human labor with automation.

Previously in the past century this dynamic gave rise to increased productivity, and wealth. But that may no longer be the case. We are not living in a world where any of our critical natural resources are forecasting a radical upswing in supply. Oil and copper, for example, remain decidedly unconcerned about substitution or miracles from space.

Importantly, we will take a closer look at the red metal (no, not the red planet!), also known as Dr. Copper. What happened to global copper production this past decade as the price rose? And how crucial will copper become, as the world tries to transition away from transport based on liquid BTU?

Click here to access Part II of this report (free executive summary; enrollment required for full access) 

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Author: Gregor Macdonald   Posted in: EROEI  fossil fuels   Tagged:                    
May 06 2012

The Inflation’s In The Poverty

May 6, 2012

The United States Department of Agriculture (USDA) produces excellent research. In March of 2010 I discussed their report, Energy Use in the US Food System, which noted that the energy-cost intensity of food production was expanding. (see: the Gregor.us blog post Paris Over Amherst: Food Energy and Credit). Given the strong advance in energy and food poverty the past few years, as reflected in soaring participation in SNAP (food stamp programs), the USDA has produced a new piece of research just last month, Alleviating Poverty in the United States: The Critical Role of SNAP Benefits. The report concludes that, SNAP benefits have a relatively stronger effect on the depth and severity of poverty than on the prevalence of poverty. Yes, that makes sense.  But something additional in a key chart from the report caught my attention. | see: SNAP participants, people in poverty, and the unemployment rate, 1980-2009. (click on image to enlarge).

I’ve drawn a red, vertical line in the USDA chart at the year 2003. As you can see, that is the year that the unemployment rate started to fall again after the previous recession, but, that the poverty rate and participation rate in food stamp programs went higher. Why the divergence? The explanation is rather obvious to me. This is the period when energy, especially oil, entered a phase transition to structurally higher prices. It’s also the period that food price inflation, and food price volatility, entered the system. Eventually all series would correlate once again, after the 2008 financial crisis.

There’s certainly no need to post a chart of energy prices here. However, I did find a fresh and up to date chart of food price inflation from a Congressional Budget Service report, Consumers and Food Price Inflation, April 2011. (opens to PDF)

What’s happened in the United States the past decade is that purchasing power for food and energy has declined. While government data shows overall inflation as tepid, the effects of this decline can be observed in real terms in the advance of poverty. This is why I began my research into city level SNAP data years ago, in the automobile and gasoline sensitive economies of southern California. Since that time a number of reports and data have recorded the strong advance of food poverty and energy poverty in the United States. If you are looking for inflation you won’t find it in the aggregate. The inflation’s in the poverty.

–Gregor

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Author: Gregor Macdonald   Posted in: Poverty   Tagged:        
May 03 2012

My Quick Preview of the 2012 BP Statistical Review

May 3, 2012

Soon, the BP Statistical Review will release its annual update to 2011 global energy data. Each year I slowly tinker with projections for global consumption, among the various energy sources, from oil to coal to natural gas. I’ll make a few calls here, today. But first, let’s take a look at where we stand in this regard, according to last year’s report (which recorded 2010 data). | see:  Global Energy Use by Source 2010.

When the 2011 data is released sometime in the next 8 weeks, I expect to see the following changes. First, global production of crude oil was flat in 2011 compared to 2010. While it’s possible that BP could record an increase nevertheless in global oil consumption–implying that oil came out of inventories to meet demand—I am going to drop oil’s share of global consumption as other sources rise. Therefore, I tip oil’s share to fall to 32.50%.  As for natural gas, I call global NG’s share to rise to 24.36%. Nuclear meanwhile stagnated as usual, thus losing more share, and falls to the 5% share mark. Hydro held its share mostly steady at 6.37%. Renewables rose fast again, to attain a 1.47% share. Finally, coal had another strong year of share gains, and finally crossed the 30% level, to reach 30.31% of global consumption.

Overall, global consumption of energy from all sources in 2011, I predict, rose by a bit more than 4.00%. This was slightly lower than the strong rebound year of 2010, owing to the European crisis in the second half and flat global oil consumption. The world continues to turn to other sources of energy now that peak oil has been reached, with the fastest growth rates in renewables, and continued strong gains in natural gas and coal.

–Gregor

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Author: Gregor Macdonald   Posted in: coal   Tagged:          
Apr 30 2012

Oil’s Bright, Momentary Flash

April 30, 2012

In 1965, after more than a century and a half, oil overtook coal as the world’s primary energy source. But only eight years later in 1973, oil itself peaked as a percentage of global energy use at 48.5%. Now, forty years later, oil is barely hanging on as the world’s primary energy source, with a much reduced role as a supplier of only 33.5% of all world energy consumption. | see: Oil’s Share of Global Energy Use 1965 – 2010.

Because global oil production has been trapped below a ceiling since 2005, at 74 mbpd, nearly all of the world’s growth in energy demand is coming through the powergrid. This means increased demand for hydro, wind, solar, natural gas and coal. Indeed, coal, which preceded oil and carried onward in a reduced role during the oil age, has been making a comeback over the past decade. On the level of power, oil held a unique supremacy for over 50 years. But the king of fossil fuels was, is, and will remain coal. And oil? Oil’s role in human history will turn out to be very brief. On a longer timeline: oil was nothing but a bright, momentary flash.

–Gregor

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Author: Gregor Macdonald   Posted in: coal  transition   Tagged:      
Apr 25 2012

American Houses and the Oil Denominator

April 25, 2012

If there’s one asset the world has little use for, it’s an American single family home priced above 250K, reachable only by car. The great, post-war buildout of America’s suburbs relied upon the continuance of a favorable arbitrage between rising wages, and low transportation costs. Now that this profitable scheme has come to an end, it should be no surprise that Robert Shiller remarked this week that housing “may not recover in our lifetime.” While some stabilization has been seen since the start of the US housing bust, Case-Shiller data showed this week that many cities hit new price lows. Interestingly, Robert Shiller is now himself noting the energy and transport cost pressure on US housing, and used the phrase “walkable cities.”

To illustrate how I see the future price path of homes in non-walkable cities, I made up the following graphic:

 

Walkable cities are very nice indeed, and I’ve been fortunate to live in several of them: Boston, New York, San Francisco and now my present city, Portland. But the majority of American homes, in order to capture any future increase in value, will need to benefit again from rising wages and flat to falling energy costs. At the current juncture, those are two trends unlikely to appear any time soon. Advantages will accrue, therefore, to US residential real estate near rail lines. Cities that wish to thrive will need to face up to these realities soon by halting all investment in roads and highways, diverting transport funding to rail and BRT (Bus Rapid Transit), and by extending these transport networks further into residential communities through walking and bike paths.

–Gregor

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Author: Gregor Macdonald   Posted in: Portland  Systems  transition  transport   Tagged:            
Apr 23 2012

Emerging Forces in Global Oil Consumption: The Middle East and Africa

April 23, 2012

Over the past decade, Asia’s transition to the leadership position in global oil consumption is well known. Starting in 2002, OECD countries slowed their consumption growth for oil and subsequent to 2005 actually saw their consumption decline. This process freed up limited oil supplies to Asia, which now accounts for 31% of total global oil use, as of the latest data. | see:  Regional Share of Total Global Oil Consumption (as of Q4 2011).

Less discussed is the emergence of new oil demand from the Middle East and especially Africa. While oil demand from younger populations in the Middle East is subsidized, and offers the prospect that future subsidy removals could slow demand, Africa’s capability to hit the world with new demand looks particularly intriguing. With roughly 1 billion people on the continent, the trajectory of future African demand could follow the same path of other emerging Asia with a ferocious insensitivity to price rises as new users come onstream, consuming only a little oil individually. Moreover, as you can see in the chart, African demand accounts for less than 4% of world demand, even though it contains over 14% of world population. In other words, in a world of flat supply, in which crude oil production has been trapped below 74 mbpd of production since 2005, Africa could easily add 2-3 mbpd of new demand over the next several years. If not more.

A small amount of petrol is a life-changer to a new user, adopting short-trip motorized transport for the first time. There are myriad reasons to watch Africa, and many who are involved in everything from agricultural development to mobile communications already do. But Africa as an emerging source of oil demand, the kind that could rapidly escalate and catch the world by surprise, is another reason to study this emerging continent closely.

–Gregor

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Author: Gregor Macdonald   Posted in: Africa  Non-OECD   Tagged:      
Apr 20 2012

The Risk of ‘Hot’ Inflation

April 20, 2012

Dear Readers: I’m currently writing a long-form post twice a month now for Chris Martenson’s excellent website. Accordingly, I’ll be publishing the first (and free) part of these essays here at Gregor.us. Enjoy. — Gregor

Ideological deflationists and inflationists alike find themselves both facing the same problem. The former still carry the torch for a vicious deflationary juggernaut sure to overpower the actions of the mightiest central banks on the planet. The latter keep expecting not merely a strong inflation but a breakout of hyperinflation.

Neither has occurred, and the question is, why not?

The answer is a ‘cold’ inflation, marked by a steady loss of purchasing power that has progressed through Western economies, not merely over the past few years but over the past decade. Moreover, perhaps it’s also the case that complacency in the face of empirical data (heavily-manipulated, many would argue), support has grown up around ongoing “benign” inflation.

If so, Western economies face an unpriced risk now, not from spiraling deflation, nor hyperinflation, but rather from the breakout of a (merely) strong inflation.

Surely, this is an outcome that sovereign bond markets and stock markets are completely unprepared for. Indeed, by continually framing the inflation vs. deflation debate in extreme terms, market participants have created a blind spot: the risk of a conventional, but ‘hot,’ inflation.

The Fears of 2008

In the spring of 2008, on the back of the Fed’s easing program that began the previous summer, many global commodities were running to all-time highs. Agricultural commodities were in the headlines, and the high price of corn had caused riots in Mexico the year before. In many respects, the 2007-2008 period prefigured some of the food price pressures that would help drive the Arab Spring three years later, in 2011. Of course, the bulk of the headlines went to the master commodity, oil, which flirted with $90 twice before breaking above the $100 barrier.

Market sentiment understandably turned to inflation. Indeed, during a few Fed meetings, Jeffrey Lacker of the Richmond Fed actually called for rate hikes. And the yield on the 10-year Treasury, which declined into a low of 3.88% towards the end of March 2008, actually rose again to 4.32% over three months into the end of Q2, 2008. The Economist magazine, always ready to provide the cover story, produced a rather memorable offering to the inflation angst that spring.

From its May 2008 story, Inflation’s Back:

“Ronald Reagan once described inflation as being “as violent as a mugger, as frightening as an armed robber and as deadly as a hit-man.” Until recently, central bankers thought that this thug had been locked up for life. Thanks to sound monetary policies, inflation worldwide had stayed low in recent years. But the mugger is back on the prowl.”

Here is the cover graphic:

Of course, we know how this particular story ended in 2008: badly. But not in the cloud of inflationary dust that the Economist magazine and hawkish members of the Fed envisioned. No, it ended “badly” with the most severe unleashing of asset deflation the United States had seen since the Great Depression, along with trillions of fresh credit dollars provided by the Federal Reserve needed just to stabilize the system during the long aftershock.

And the Deflationists Still Hold Some Cards

Four years later, the deflationists are still holding a few cards. True, actual recorded deflation was very brief and lasted only 6-9 months immediately after the crisis. And the deflationary spiral many predicted never did occur. Meanwhile, since 2008/2009, poor wage growth in the OECD and the continued supply of cheap labor from the developing world have ensured that one of the classic starter formulas for ‘traditional’ inflation — tight labor markets and rising wages — has failed to ignite.

Probably no market better expresses the ongoing, structural headwind to developed market inflation than the busted housing market. US households have indeed been working off their debt levels the past few years, but have only reduced those levels by a little more than 3%, from the 2007 highs. With so many Americans still unemployed or underemployed, and with debt levels that constrain purchasing power and also constrain mobility (i.e., the ability to move across country for a new job), it’s no surprise the US housing market remains trapped at levels far below its highs.

Of course, we know how this part goes.

The above chart comes from the February 2012 Economic Report of the President. The above chart (from Chapter 4 of the report) shows that the current bust, in real terms, has seen the worst price decline of all, compared to other historic declines over the past century. Indeed, that there is now little prospect that US residential real estate will ever recapture the old highs says a lot about structural shifts in everything from energy prices to our workforce, that the US faces at least until the end of the decade.

Stealthier Versions of Inflation

But wait a moment. Even if US residential real estate is fated never to be a recipient of inflation, owing to its dependence on oil prices and the automobile-highway complex, is it not the case that Americans have had to endure already a great loss of purchasing power for some time already? The US story of poor wage growth is now marked by some as far back as the 1970s. That is the longer timeline that is often used to explain the transformation from single-earning to double-wage-earning households. Moreover, health care, food, energy, and education costs have seen outsized gains the past 10-15 years.

Considering that most US pension funds, whether by plan or through individual retirement accounts, rely on the stock market, it seems fitting to mark the performance of the SP500 against a basket of commodities. After all, every retiree (and many an institution) eventually converts their financial capital into resources for living. One chart that I like shows the 15-year performance of the SP500 against the most preferred liquid energy in America: gasoline. (chart courtesy of FRED)

While tediously repetitive, the term Middle Class Squeeze still carries weight, as all of the previous components of the problem have only been exacerbated more recently by high energy prices. The purchasing power of the SP500 has literally crashed against oil. What’s particularly handy about the above chart is that when the SP500 was roughly at 1400 near the turn of the millennium, gasoline was indeed (briefly) around $1.00 per gallon. Now, over 12 years later, the SP500 once again trades near 1400, only this time, gasoline sells for 4 times as much, around $4.00 per gallon. But is this inflation?

The loss of purchasing power is certainly a form of inflation. However, what we’ve seen in the past decade is that many of the price changes affecting Western economies have not been driven by tight labor markets, wage inflation, or even reflationary policy — which the US has engaged for much of the past ten years. Instead, price level changes have emanated most strongly from the universe of natural resources, including everything from copper to oil, and, of course, agriculture. There is no question that cheap money policies from both the US and Japan have been driving speculative bubbles for some time. But housing and stock market inflation, as we have seen, have been transitory.

Structural Changes in Global Price Levels

Inflation has been running fairly hot in developing markets for some time. In regions like Asia, pressured to source food as growing populations bump up against limits to available arable land, the amount of capital devoted to food, shelter, and transportation remains high. However, if we think of lower-earning populations across the globe as a single class, there has been no protection from higher prices offered by developed economies to their poorer populations. The bottom two quintiles of US wage earners struggle with food and energy costs just as much as their counterparts across the globe.

These structural changes in price levels, along with the increasing inability of every population to endure them, have fallen into a statistical gray area. Headline measures of inflation in OECD countries churn out benign readings, while at the same time, poverty grows. But this is a particular kind of poverty, a food and energy poverty, which saps the power of consumers to spend disposable income on an array of other items.

This emerging resource poverty is going to drive further changes in price levels, and in particular it will restrain many forms of consumption, including real estate prices. Cities will find, for example, that with the price level of food rising and real estate prices stagnant with rising transportation costs, urban farming is going to advance very strongly. Note, for example, the resurgence in urban farming in places like Brooklyn, NY, where large tracts of industrial land have lain fallow for decades. Indeed, a classic pattern of ‘hot’ inflation is that it quickly begins to drive out spending for discretionary goods in favor of true basics, like food.

The Risk We Face

The United States currently enjoys reserve currency status, which enables it to borrow cheaply, and which keeps capital circulating through our government bond markets, which are the largest in the world. Given the backdrop to our post-credit-bubble environment, it is now the consensus view that we will cut a path similar to Japan’s as we oscillate from weak growth back to the stimulative rescue policies of the Federal Reserve.

There is therefore a sense of complacency about an escalation in prices.

In Part II: The Triggers That Will Spark ‘Hot’ Inflation, we explain how many of the factors which have restrained prices globally at colder levels will start to run hotter soon.

First, there are structural changes taking place in the developing world with regards to urbanization and the trajectory of labor markets. Can the supply of cheap labor in the non-OECD continue indefinitely?

Second, populations in the OECD are increasingly trapped in “safe” investments, such as government bonds, which currently restrain interest rates from moving higher. But this also creates a latent vulnerability for if perceptions of safety and loss of purchasing power were to shift hard. This shift in perceptions is ultimately more critical in any step-change to higher inflation than the supposed quantity of “money-printing” that’s been undertaken by global central banks.

Finally, we look at the assets that will benefit, as well as those that will suffer most, should a stronger inflation develop.

Click here to read Part II of this report (free executive summary; enrollment required to access).

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Author: Gregor Macdonald   Posted in: Debt  Economics  forecast   Tagged:          
Apr 17 2012

North America Takes Further Steps to Export its Natural Gas

April 17, 2012

North America has a number of LNG export projects underway, mostly in Kitimat, British Columbia. But yesterday the US Federal Energy Regulatory Commission (FERC) approved the first application for such a facility in the lower 48. Until these projects are operational, North American natural gas will continue to be trapped by geography. And, given that prices here are near $2.00 per million btu, I thought it would be enlightening to pull the most recent data chart from FERC, showing what customers pay for the same amount of NG, in liquified form, around the world. | see: World LNG Estimated April 2012 Landed Prices.

While it may seem obvious that US and Canadian natural gas producers, and the laws of the free market, yearn to capture the yawning spread to much higher prices in Europe and Asia, it’s not clear yet where global prices will converge, exactly, when North America sends its first LNG “trains” out to the world. I have taken a middle road on North American NG supply (in contrast to my views on global oil) and have been adamant for years that supply optimists and supply pessimists will both eventually be disappointed. Mainly, I think that once the resource is hit hard, pulled along by the next leg of demand from exports, that all the latent problems associated with fracking–the energy and water intensiveness of drilling, and the damage to the environment in populated areas—will reveal themselves. My colleague Chris Nelder has suggested, accordingly, that the dream of booming LNG exports is ultimately a siren song that policy makers might want to consider. Or, reconsider, if you will. Indeed, capturing some portion of the higher world price will absolutely mark the bottom for North American NG, and thus the end of the price level which Americans currently enjoy. Perhaps this is why investors from Jeffrey Gundlach and Wilbur Ross are buying natural gas assets right now, according to The Business Insider.

–Gregor

Graphic: FERC.

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Author: Gregor Macdonald   Posted in: exports  LNG  NG   Tagged:            
Apr 13 2012

Global Oil Production Update: EIA Revises Two Decades of Oil Data

April 13, 2012

With the most recent release of international oil production data, EIA Washington has revised figures back to 1985. This is one of the most comprehensive revisions I have seen in several years. Generally, the totals were revised slightly lower, and this was especially true for the past decade. Data for the full year of 2011 has now completed. | see: Global Average Annual Crude Oil Production mbpd 2001 – 2011.

Since 2005, despite a phase transition in prices, global oil production has been trapped below a ceiling of 74 mbpd (million barrels per day). New production from new fields and new discoveries comes on line, but, it has not been at a rate fast enough to overcome declines from existing fields. Overall, global decline has been estimated at a minimum of 4% per year and as high as 6+% a year. Given that new oil resources are developed and flow at much slower rates, the existing declines present a formidable challenge to the task of increasing supply. I see no set of factors, in combination, that would take global production of crude oil higher in 2012, or next year, or thereafter.

–Gregor

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Author: Gregor Macdonald   Posted in: EIA  Oil   Tagged: