Shale Gas 2008
December 31 is as arbitrary a date as any to make predictions, which we will, giving the usual nod to the old adage that predictions are dangerous, especially about the future.
Nothing underlines the futility of futurology more than what has happened over the past year: Even someone as contrarian as ourselves wouldn't have wasted electrons predicting bank nationalisations, collapse of the world economy, $100 range for oil over six months etc etc. We would have taken long shots on President Obama, the rise of the Euro and a new emphasis on energy conservation, but throw enough predictions on the wall and some will stick.
What interests us is not that people make predictions. One of today's marketing buzzwords is "the narrative": people like to be told stories. What interests, amazes and shocks us is how much money some people pay other people to tell them these stories. And stories they are. One person's narrative can be either a fairy tale or astrology or a religion. But people pay for narratives/horoscopes/creation myths much more if a financial analyst throws in a few charts and sells it as a research note.
Or at least they have until now, and the fact that going forward people won't be so eager to shell out what little cash remaining on hand to listen to stories will be revealed as one great positive to come out of this mess. The whole house of cards came down because some, OK most of us, believed in a really dangerous fairy tale: risk had disappeared, and the world would have an unending march towards eternal prosperity. In our little niche of specialisation, this was particularly true of energy risk: people wanted to ensure that they would have fixed energy costs, even as we saw that the rest of the risk spectrum was disintegrating. Result: many fixed energy costs in Q2and Q3 which only ensured facing much higher energy prices than those who, like ourselves, belong to the que sera, sera school of risk management. Energy prices are as inherently unpredictable as every other thing people "forecast": stock prices, house prices, interest rates, currencies, weather: All of them can be predicted with declining accuracy the longer the time horizon. But people are waking up to the fact that saving energy saves money whatever the price is,however far in the future one feels this compulsion to predict.
One interesting thing about UK gas and power prices year on year: Oil is down 60% but gas is broadly similar: 55 pence per therm year ahead last New Year's Eve and this one. Does this mean that gas has further to fall? Possibly. And possibly not. Que sera, sera. Predicting the future by simply extrapolating the past, simply doesn't work. Our favourite economic quote comes from John Maynard Keynes, whose ideas no one would have predicted as coming back from the dead last New Year's Eve: In the long run, we'll all be dead.
Checking both actuarial tables and our vital signs, we make a hopeful prediction that on December 31 2009 we will still be able to make predictions. Anything more than this is mere guesswork. But we can't resist telling some stories ourselves, and again using the theory that the greater the number of predictions the more likely that one at least will come true, here goes, but with a caveat. Some of these predictions will come true, but when? One year is relatively short, so we increase our odds by saying that over time, by lets say 2015 (which is closer than we think) more of these will likely be to correct than those of which will be shown by history to have been spectacularly wrong:
- Will Obama save the world? Let's hope so, while hoping that the American people face up to the reality that they re-elected Bush. They fell for his narrative, and the whole economic system he was part of must, (will?) also change. If they can do this, and early signs are good, then the latent dynamism of the US could have a major impact on the rest of the world.
- But one part of the realignment will be the need for a multi-polar world. We believe the US can deal with that. But can Britain? For sixty years, UK governments have slavishly followed the US right wing policies: Now the US is left of centre, will they continue to follow the model, or will they listen to the failed older Washington Consensus and not the new? Reading UK newspapers, written by lazy, incurious journalists who find it easier to trot out old cliches or Conservative thinking, it appears not. When the Tories equate Labour economic policies with a "loss of moral compass", it speaks to us of a failure of imagination and simple British pig headedness in refusing to face up to new realities. One solution: stop reading UK newspapers until they have something new to say: it only encourages them.
- It may not happen this year (note the may) but the pound is dead. An ex-currency. But when the predictions are not ony for euro parity but also for dollar parity, it only makes us hope it comes sooner, although as this is Britain, by definition it will come later.
- Going back to Obama, the re-tooling of the economy is tied up with a new energy economy. Less is more. Not acting is as valuable as acting. Waste, of resources, time and over-consumption will be a thing of the past.
- Will the 2009 economy have green shoots of recovery, or simply a whole bunch of deadwood bankers? Depending on the day, it's more likely the latter. We'll make a prediction that may sound radical today, but one has to bear in mind that it would have only been made by a madman two or three years ago, so the likelihood is going the right way: Things will get so bad that legally, as well as de facto, most of the world banking sector will be state-owned. Citibank and Bank of America and Barclays and everyone else will be the Moscow Narodny bank of the 21st century.
- Technology will be the salvation of us. It may not give us back money, but it will provide time. People will invest that time in doing productive things which currently have no value: Sleeping, reading, making music, walking, making love, cooking real food, traveling, playing with children and yes, even story telling. We may be poorer measured in money and what it helps us consume. But the Gross National Happiness will be off the scale compared to today.
If we make it to 2015, or 2020, in one piece it will be because people abandoned old concepts not retooled them. We are optimistic that we'll make it. What alternative do we have?
Appearances are deceptive
A story in the NYTimes today underlines again the paradox of thrift in energy:
The best way of cutting energy costs is cutting energy use. But saving money simply by using less is a less obvious course of action to many than appearing to do something to save money.
energy experts armed with mostly low-tech tools but strong sleuthing skills, finding flaws that let the air inside a house go through a full exchange with the outdoors twice an hour, instead of once every two or three hours.
Correct those flaws, and heating and cooling costs are typically cut by 20 percent to 30 percent, a saving of more than $1,000 annually in some households. In addition, carbon dioxide emissions and the strain on the national electric and gas systems are reduced.
Energy technology research competes for federal aid, said a spokeswoman for the Energy Department. Some states contribute their own money or divert federal money intended to help the poor pay their energy bills.
But utilities that furnish electricity, natural gas and home heating oil have lobbied strongly for programs that provide money to help pay bills.
Here in the UK, despite successful insulation programmes for the elderly for example, we still tend to think the same way.
In I+C energy the emphasis has been on lowering energy price, not energy use. TPIs and government have pushed market forces to lower the cost of energy instead of looking at the amount of energy consumed.
Should we spend billions on new nuclear plants? Or try and reduce use, for lower and quicker paybacks?
The end of expertise
What does the economic collapse foretell for the future of the economic experts who failed miserably to predict it?
An entire field of experts dedicated to studying the behavior of markets failed to anticipate what may prove to be the biggest economic collapse of our lifetime.
One portent should be: don't pay for expertise. Forecasts are for the foolish, told by the incompetent or the criminal.
Every year they roll this one out and why not? People are suckers for either disaster stories or narratives with heroes, villains, and easy answers. And every year they fall for this one.
Like the Tories with deficit spending, many people still can't quite come to terms with a post Cold War world. They equate Putin's Russian eagle with a Soviet Hammer and Sickle. At least the Soviet Union as threat scenario hung on at least remotely credible back story of a global ideology replete with millions of fellow travelers ready to use gas as a weapon to strangle Europe. Although as we now know, the CCCP threat was seriously overstated to serve both a variety of domestic political agendas. The specific reality of Soviet gas supply was that it ran uninterrupted throughout any number of cold war crises: Afghanistan, KAL 007, Chernobyl, Olympic Boycott etc etc.
It's hard to see what fate would befall us in Europe if we gave in to Russian "demands". Would Russia stop sending tourists filled with money to Harrods and stop investing in Monaco or St Moritz?
But most Januarys lately, the story is Russian holding Europe hostage to energy by asking Ukraine to pay for it's gas. Some reality checks here:
- If Russia and Ukraine have a fight over gas, you as a customer of Gazprom UK, or anyone else wont be impacted. It sounds unbelivable that people would think they might, but some really stupid people do.
- If this is a battle between economic liberal democracy as represented by Ukraine's US neo-con pals on one side and Russian statism on the other, why shouldn't Ukraine pay full world prices for energy like the rest of us?
- Are we missing something here, but if Ukraine don't pay for their gas, and use the Russian gas being transited across their country for their needs, isn't it Ukraine holding Europe hostage?
The other side of import dependency is export dependency.
Sowing fear over "security of supply" non-issues pushes prices up. There is no gas shortage anywhere on earth. Why on earth pay more for it?