Dr. Doom goes to Beverly Hills
When it comes to predicting a dark future, Nouriel Roubini – the NYU economist who earned the moniker Dr. Doom after he correctly predicted the financial crisis – is not about to let anyone get in his way.
Even if it’s his host. And even, or maybe especially, when there are 500 witnesses.
That’s precisely what happened Wednesday morning, when Michael Milken – the former junk-bond king – shared the stage with Roubini at Milken’s Global Conference. What was billed as an interview in one of the Beverly Hilton’s grand ballrooms had the feel of a pitched battle.
Roubini warned of a massive oil shock following a potential clash between Iran and Israel – or possibly the United States, sometime after the November presidential elections. He talked about geopolitical instability in the Middle East. “It’s a mess,” he said.
Milken countered with a graph showing the U.S. has bigger fossil fuel reserves than any other country in the world, and suggested that natural gas, extracted from shale reserves that are largely outside the Middle East, will eventually make Arab clashes irrelevant to energy.
Roubini: “I think people are a bit too optimistic about how fast the shale revolution is going to occur…. I think people believe that in five years from now we are going to be energy independent – I think they are deluding themselves… I think it’s more like a 10-20 year process.”
Milken: “I think I want to answer that with leadership.”
What’s behind the spike in oil prices?
It’s easy to blame tensions with Iran for all of the recent spike in petroleum prices. But there are other catalysts for the market’s sudden surge. For one thing, U.S. economic data have been consistently surprising to the upside while the European situation appears loosely under control, both factors that suggest the global economy may yet coast along through 2012 without faltering.
Then there are the actual hits to supply taken due to geopolitical events around the world, says Marc Chandler at Brown Brothers Harriman, which in just two months have helped push Brent crude prices more than $20 higher to a 10-month high above $125 a barrel:
There has been a genuine supply shock. Between Sudan, Yemen and Syria, nearly 750k barrels per day (bpd) have been taken out of production due to political instability. On top of this Libyan oil output is about 600k bpd below pre-civil war levels.
The Iranian confrontation and its response (to cut sales to the UK and France) has also taken supply out of the market. The bellicose rhetoric and fear of an escalation raises the risk premium as well. There are other, less significant supply disruptions. Aging infrastructure has seen North Sea output decline. Venezuela output is also lower.
There is also a role of increased demand. Japan, for example, is replacing some of its nuclear energy with oil. Its oil imports appear to be running about twice pre-tsunami levels. In addition, there has been some pick-up in demand from Asia. Note that the IEA forecasts oil consumption to rise 830k this year after a 740k bpd increase last year. The unusually cold European winter is also thought to be boosting demand.
Yet global markets are strangely circular: the very economic optimism that is sending oil prices higher could actually be dampened by the harsh reality of higher energy costs. Already, stock markets were taking a hit on fears that the increase in crude costs would derail the global recovery.
As Chandler notes:
Investors are well aware that most U.S. recessions (10 of past 11) were preceded by a surge in oil prices.
Four yardsticks for sovereign wealth funds
Sovereign wealth funds, a $3 trillion industry managing windfall revenues for future generations, arguably need a set of benchmarks different from those used by other private investors as they are state-owned. Andrew Ang, an associate at U.S. National Bureau of Economics and a professor at Columbia Business School, proposes the following four benchmarks in a recent paper distributed to SWFs.
The Benchmark of Legitimacy. Whatever the source of wealth, the SWF exists to transfer the benefits of that wealth from the present to the future. Without this benchmark, the money in the SWF is at risk of being immediately depleted. A necessary condition to maintain legitimacy is to have well-developed legal institutions in place.
The Benchmark of Integrated Policy and Liabilities. A critical part of this benchmark is detailing how and under what conditions the money can be distributed from the fund. Clear, yet flexible, spending rules must be set to meet well-defined liabilities.
Governance Structure and Performance Benchmark. There is no single optimal governance structure or performance benchmark, but creating a culture of professionalism and market discipline ie key. For many SWFs, the ideal mandate is a real return target plus some spread.
Long-Run Equilibrium Benchmark. Their long-term horizon may require SWFs to pay attention to issues that are not on other investors’ immediate investment strategy, such as climate change, child labour, or water management. In fact they may be in a unique position to profit from the market’s mispricing of these externalities.
Sovereign wealth fund and a remote island
Little Diomede, a remote U.S. island in the Bering straits only 2.5 miles from Russia, has 129 people living in a traditional Ingalikmiut Eskimo village.
On an island surrounded by rocky slopes and harsh storms with the sea frozen for half a year, employment is limited to the city and school whereas seasonal mining, construction and commercial fishing positions have been on the decline.
Little Diomede villagers are part of tens of thousands of qualified Alaskans who receive dividends from regional wealth fund Alaska Permanent Fund.
At least 25 percent of resource-related revenues are placed in the fund, which invests its assets of over $34 billion in a diversified portfolio of public and private assets. Currently their asset allocation consists of 38 percent in stocks, 22 percent in bonds, 12 percent in real estate, 6 percent in private equity and 2 percent in cash.
Alaskans enjoyed the highest-ever dividend of $3,269 in 2008 when a one-time $1,200 Alaska Resource Rebate was added, at a time global markets were tumbling with the collapse of Lehman Brothers. But in 2009, the dividend fell sharply to $1,305.
For Little Diomede villagers, the fall in dividend must be a blow. The fund may need to make a lot more profit to finance a possible mega-infrastructure plan: according to the village website, some residents are interested in relocating the village, due to the rocky slopes and harsh storms, lack of useable land for housing construction, and inability to construct a water/sewer system, landfill or airport.
For more stories on sovereign wealth funds, click on: http://r.reuters.com/dem56h, http://r.reuters.com/caj36h, and http://r.reuters.com/dah75h
I live in a terrible place, please pay me much money to move to a better place. Do people in Detroit get this aid as well? 
Big ambition for Equatorial Guinea
This week has seen a rush of key policymakers and business executives from Africa flocking to London. Apart from Sierra Leone, oil and gas executives have been discussing the outlook for Equatorial Guinea, a small central African state rich in oil.
Equatorial Guinea made a relatively rare foray into the global news earlier this month for a presidential pardon of former British army officer Simon Mann, who was serving a 34-year prison sentence in the country for his role in a failed coup d’etat in 2004.
Gabriel Obiang Lima, vice minister of mines, industry and energy, was in London to talk about his ambition for the country. “Our aim is not to be the Kuwait of the region. It’s to be the Singapore of the region,” he told dozens of business executives in a conference in London on Wednesday.
“Equatorial Guinea has to have other industries that are not dependent on oil and gas.”
But it has a long way to go towards establishing a Singapore-like country. The U.S. State Department says application of the laws remains selective and corruption among officials is widespread, and many business deals are concluded under nontransparent circumstances.
The vice minister says Equatorial Guinea is investing heavily in ports, health care and infrastructure.
Running out of resources
Oil prices are more than double the December-February troughs and commodity prices generally are going up as the market cheers signs of an economic recovery.
Jeremy Grantham, chairman of U.S.-based money monager GMO, warns that the world is running out of resources in the long run yet is not correctly pricing the fact.
“We are simply running out of everything at a dangerous rate… As we move through our remarkable and irreplaceable hydrocarbon reserves, the price will, of course, rise remorselessly to ration supplies. We need, it seems, the shock of a Pearl Harbor to really gear up and make sacrifices,” he says.
Grantham points out that in 1977 President Jimmy Carter warned that we were running out of oil and urged people to fully insulate 80% of the houses in 10 years.
“Thirty precious years have passed, and there is now no safety margin. We must prepare ourselves for waves of higher resource prices and periods of shortages unlike anything we have faced outside of wartime conditions,” he writes.
“In fact, I believe we are already several years into this painful transition but are still mostly invested in denying it.”
I believe strongly that we need to recycle and begin resources recovery at our nations landfills. Because what seems useless to us might be useful to other nation. so lets try to learn not to be wasteful no matter the circumstance. It really hard to believe that a country is runing out of resources, but is the real fact.
Oil, the U.S. dollar, and those green shoots
This sounds awfully familiar. Oil prices have risen sharply from a March trough, while the U.S. dollar has fallen 10 percent against a basket of currencies. A bad 2008 flashback? Not quite.
Riccardo Barbieri, head of international economics at Banc of America Securities-Merrill Lynch, says oil merits close watching to make sure it does not rise too far, too fast. For now, it does not pose an imminent threat to U.S. or global economic recovery.
”Our economists around the world feel that as long as oil prices did not rise significantly above $80 per barrel, that would not prevent an economic recovery in the second half of the year,” he wrote in a note to clients. “A further rise in oil prices would act as a tax on importing nations, and we would worry in particular about the U.S. consumer.”
A jump in oil prices would also be a headache for central bankers in the rich world because it would bring an unwelcome dose of inflation when the economy is too weak to handle an interest rate rise. If emerging markets stage a strong recovery, driving up oil demand and prices, the U.S. Federal Reserve and other central banks “may have to accommodate a rise in headline inflation, lest the economy fall into a dangerous double dip,” Barbieri said.
This is a fight between bubble economies and non-bubble economies. When the top marginal income tax is high, say 74% under LBJ/Nixon/Ford/Carter, bubbles are unlikely; the OPEC blockade was external. Otherwise, you get bubbles in defense in the 80s or dot-coms in the 90s or housing in the 00s. Milikien’s 80s fortune was from his junk-bond business that earned $500M/year, easily double that in 2012 dollars. Maybe if Stephanie/Thom/Randi were allowed to compete with Beck/Rush/Hannity on the radio this would be common knowledge.