A brilliant piece in today's times by Bjorn Lomborg, one of my favourite environmentalists. While the world goes mad jumping on every passing bandwagon with a climate change banner, there is precious little common sense being applied. Lomborg's simple case that we should cost actions in seems to be ignored by the vast majority of environmentalists. His calculations suggest that for every pound the UK is spending, we will receive roughly 4p worth of good. The money could and should be spent elsewhere.
I can't disagree with a thing he says. His analysis is spot on.
What irritates me more than anything about the whole climate change debate is the almost total ignoring of the effects of future technology with its consequences for business and social change.
All the projections of doom and gloom rely on technology staying similar to today, yet the assumption is that we will still consume more and more. So environmentalists take full account of increasing wealth and consumption, without taking any account of what we will actually be consuming, or how it is made or used. We still see lots of ads telling us how important it is to switch off TVs and other IT and not to leave them on standby. The fact is that these devices don't use 30W on standby any more, it is now more like 0.1W. Recent rises in oil prices have already led to car manufacturers accelerating their plans for electric cars, and caused hundreds of entrepreneurs to get into new energy technology. Panic is not required, solutions are being developed and will be delivered. Not tomorrow, but easily early enough to prevent anything like the doom and gloom being forecast for the long term.
In this light of rapid technology development and the mid term solving of climate change, and the certain aversion of long term doom, Lomborg's criticism of the extreme waste of money on reducing CO2 emissions becomes even more appropriate. Governments are spending extreme amounts of money on very little gain, whereas if they spent much less in the right areas, such as technology R&D, they would accomplish much more.
So why is this in my finance blog rather than my grumpy old man rant? One day, in the not too distant future, the tide will turn, and it will be obvious to everyone that the money has been misdirected. Companies that are developing genuinely useful technologies will flourish, whiloe those sustained by the financial fallout of environmental hype will suffer and most will die.
Time to start looking at your portfolio and weeding out shares in so-called ethical companies, and any that spend a lot of effort to tell everyone how environmentally sound they are. I'd rather have sound financial and business management any day than a CEO whose main effort is to appease the stupid end of environmentalism. The day of reckoning will come sooner than you think.
Tuesday, 30 September 2008
bank collapses and the suspension of logic
I have been asked several times recently to comment on the economic collapse and have refused to do radio shows because I know too little about economics to make any sensible comment. Or so I thought. But the decisions our leaders have been making in response suggest I am not the only one who knows nothing. I am astonished at how much absolutely obvious sense has been thrown away in the panic. Our UK treasurer has responded to the collapse of Bradford and Bingley by selling much of the bank to the Spanish Santander, while keeping most of the debt. Fair enough if the deal was sound, except that the price he sold it at was only sensible if Santander also took on most of the debt. As far as I can tell from the figures in the morning papers, he effectively sold £21Bn of safe cash for £610M, while the UK taxpayer kept all the debt. Sure, the bank shares were worthless, but cash is cash, and debt is debt, and even if the overall sum is low, the cash bit is still cash, bank branches are still branches, and still worth just as much. Banco Santander must be laughing themselves silly at the stupidity of the UK treasury. I am feeling rather let down, having had a large chunk of my hard earned money given away to a bank for no good reason. Along with every other UK taxpayer. Why is our government so panicked into doing something that they will do anything, regardless of whether it makes any sense? Surely in time of crisis, actions need more than ever to be thought through sensibly.
In any case, I am rather puzzled by this whole thing, and I am not alone. Why is it such a big problem if some banks go under? They can't all fail. The world economy is perfectly sound. People are working, generating wealth. Some people have surplus, others want to borrow. If every bank went broke, new ones would spring up on the internet tomorrow to ensure that borrowers are put in contact with savers, for a cut. As it is, some banks have overstretched, and bought bad risks from other banks, and they deserve to suffer the consequences of their own bad decisions. Other banks who haven't done so will survive, since their assets outweigh their bad risks.
Of course, the situation has created an atmosphere of distrust, and slowed liquidity, but throwing away good money at people who have already proven should not be allowed to manage it does not seem a good idea. Capitalism hasn't failed, the companies failed, that's all. If they are allowed to die, no big deal. Life, business, and the flow of money, will quickly return to normal. The real problem is if taxpayers' money is thrown away, taxes increased, and people can't afford to live well. That will certainly collapse economies.
So, I don't get it. Perhaps I am missing something, but I suspect not. I suspect the real problem is that our leaders don't get it, and are far too willing to listen to bad advice from people who stand to gain a great deal of money from it. If I were in power, I would leave the market alone. It will be very turbulent, lots of people will lose money, and lots will gain. And the banks that survive might be a little more sensible in future. Bail them out, and the pain will affect everyone for a very long time, and the banks will still take bad risks, because that is how their executives are incentivised.
In any case, I am rather puzzled by this whole thing, and I am not alone. Why is it such a big problem if some banks go under? They can't all fail. The world economy is perfectly sound. People are working, generating wealth. Some people have surplus, others want to borrow. If every bank went broke, new ones would spring up on the internet tomorrow to ensure that borrowers are put in contact with savers, for a cut. As it is, some banks have overstretched, and bought bad risks from other banks, and they deserve to suffer the consequences of their own bad decisions. Other banks who haven't done so will survive, since their assets outweigh their bad risks.
Of course, the situation has created an atmosphere of distrust, and slowed liquidity, but throwing away good money at people who have already proven should not be allowed to manage it does not seem a good idea. Capitalism hasn't failed, the companies failed, that's all. If they are allowed to die, no big deal. Life, business, and the flow of money, will quickly return to normal. The real problem is if taxpayers' money is thrown away, taxes increased, and people can't afford to live well. That will certainly collapse economies.
So, I don't get it. Perhaps I am missing something, but I suspect not. I suspect the real problem is that our leaders don't get it, and are far too willing to listen to bad advice from people who stand to gain a great deal of money from it. If I were in power, I would leave the market alone. It will be very turbulent, lots of people will lose money, and lots will gain. And the banks that survive might be a little more sensible in future. Bail them out, and the pain will affect everyone for a very long time, and the banks will still take bad risks, because that is how their executives are incentivised.
Monday, 8 September 2008
Oil price $30 per barrel by 2030
Oil is a valuable commodity and the subject of a great deal of panic right now. The panic is based on ill-informed doom-mongering, with little basis in reality. Some long term perspective might be useful.
By about 2030, as a result of technology development, stimulated at least in part by high oil prices today, solar energy farming will be a big business. Already, work is under way to start building solar farms in the Sahara, where suitable land is both plentiful and cheap.
The staring point for a calculation must be the energy equivalent of a barrel of oil, since that is the prime purpose of oil today. Each barrel contains approximately 6 gigajoules of energy.
Assuming that solar panels can be mass-produced, with a sunlight conversion efficiency of about 12%, at a cost of $200 per sq metre, in today's money, a 1 sq metre panel will generate approximately 8.5kwh of energy per day, equating to 1 barrel of oil every 6 months. The land also needs to produce a good income for its developer, who would presumably be happy with a return of $50,000 per hectare for otherwise worthless land, i.e. $5 per sq m per year, and assuming that 50% of the land is covered by panel, that translates into $10 per panel + depreciation costs, of say $50 per year for a 4 year write-off. With total revenue of $60 per panel per year, 6 months is $30.
If the energy equivalent of a barrel of oil can be generated for $30, it is reasonable to set this as an upper limit on the market value of oil, when used for fuel. Prices of oil for other purposes such as plastics manufacture or specialist industries may be higher.
However, since oil is mainly used for fuel, substitution in this market by cheaper alternatives such as solar power will lead to a gradual collapse in the oil market as supply far outstrips demand. Therefore, most oil will probably be left in the ground, and it will be much cheaper than today in real terms.
By about 2030, as a result of technology development, stimulated at least in part by high oil prices today, solar energy farming will be a big business. Already, work is under way to start building solar farms in the Sahara, where suitable land is both plentiful and cheap.
The staring point for a calculation must be the energy equivalent of a barrel of oil, since that is the prime purpose of oil today. Each barrel contains approximately 6 gigajoules of energy.
Assuming that solar panels can be mass-produced, with a sunlight conversion efficiency of about 12%, at a cost of $200 per sq metre, in today's money, a 1 sq metre panel will generate approximately 8.5kwh of energy per day, equating to 1 barrel of oil every 6 months. The land also needs to produce a good income for its developer, who would presumably be happy with a return of $50,000 per hectare for otherwise worthless land, i.e. $5 per sq m per year, and assuming that 50% of the land is covered by panel, that translates into $10 per panel + depreciation costs, of say $50 per year for a 4 year write-off. With total revenue of $60 per panel per year, 6 months is $30.
If the energy equivalent of a barrel of oil can be generated for $30, it is reasonable to set this as an upper limit on the market value of oil, when used for fuel. Prices of oil for other purposes such as plastics manufacture or specialist industries may be higher.
However, since oil is mainly used for fuel, substitution in this market by cheaper alternatives such as solar power will lead to a gradual collapse in the oil market as supply far outstrips demand. Therefore, most oil will probably be left in the ground, and it will be much cheaper than today in real terms.
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