Wednesday, 27 October 2010

How Energy Price Will Affect the World Economy



Energy is wealth. In today world and modern civilization, energy has become so essential above roof for our head and food on the table. Electricity light, refrigerator, vehicles, power plants, shopping complex, houses and even lamp street is powered by energy. Today oil and gas has become primary source of energy replacing coal. As we know that oil and gas is limited in supply as our consumption has set all time record high since oil field is discovered during 1859 by Colonel Drake in Titusville, Pennsylvania.

Since year 2002, oil price has been incidentally increase as consumption progressively absorbed most of the reminder of world's buffer of excess capacity, which reached 10 million barrels a day in 1986. In years past, the buffer of such excess capacity of oil being produced, natural disaster in the scale of Katrina and Rita will not produce any shock to the oil price. By 2005, even an unexpected maintenance shutdown in some big refineries plant in the world will drive the price higher. Oil price has been so sensitive as our daily consumption keep growing especially at some emerging country such as China which the consumption rate is growing at exponential pace. In US alone, there are 8 million of gas gazzling truck on road everyday, which consume up total gasoline more than all the vehicle added up in Europe.

In today market, there are many other uncertainty that will drive oil price crazy. Volatility has been highest since 1971 oil crisis in US under president Nixon administration. Terrorism that prevail across middle east and some other oil producing country will create a treat to the safety of its refineries plants. Any strike to those refineries plants will result oil price to spike overnight. It is true that there are numbers of innovation in oil and gas industries such as deep sea exploration, yet such the high cost of such operation will not mitigate the price of oil. OPEC, recently had very reluctant in increasing its output capacity to accommodate the increasing demand of oil from the world. Oil reserve from the developed country has gone very low from 113 billion barrel during 1997 to less than 80 billion barrel in 2006. Such depletion of reserve will soon run off, therefore there will be no buffer to any surge of demand from day to day. Price of oil will be so sensitive, with any sudden surge of demand will sky rocket the price. Even being reported there are number of new oil field are discovered, the refineries capacities could not promise to handle the new discovered oil, at least for few years to coming. It take years to upgrade the technology in refineries capacity, and it is very costly. Another treat is global warming and changes in climate across the globe. Numbers of disasters has been reported to hit oil producing country like Indonesia. Such unpredictable incident could create a shock in oil market.

Before the first gulf war during early 1990s, oil price has been about 20 usd per barrel. During 1991 to 1999, oil price are at the range of 20usd/barrel to 35usd/barrel. But since 2006, oil price had reach all time record high at more than 110usd/barrel. It all drive up by the factor of supply and demand. IEA (International Energy Agency) recent contingency forecast, assuming the OPEC will lag in expanding its crude oil capacity, the average world price of oil will be at 130 usd/barrel. Oil demand on 2030 will be surprisingly strong according to the IEA pundits at about 116 million barrel a day versus 84 million barrel a day during 2005. Such surge in demand which do not accommodate with proportional increase of supply will drive oil price to some astronomical number. What will you do if the price of oil increase more than 50% or even 100% overnight? What is your salary growth rate? Can you afford to drive your car anymore? What will affect to your spending pattern if energy bill is so high? Energy price will not only cause gasoline price increase but also, any businesses associated with it including transportation, manufacturing and even some other services provider. Your utility bill will be increase if the oil price is high.

Yet, not to be too pessimistic on current trend of oil price. many innovative measurement had been taken. Hybrid cars is introduced to replaced high fuel consumption vehicles. Conservative and renewable energy become more popular in developed country powered by wind and solar. Nuclear power is one of the key to replace power plant that run by hydrocarbon despite of it unpredictable aftermath reaction. Still, history had proven that most of the nuclear reactor across united state had found no dramatic side effect to people and environment. Study had justified that a great scare of Mile Island incident of interrelationship of nuclear power plant to thyroid cancer during 1979 - untrue. Nuclear power plant by prudently utilize, could create the energy that human race ever needed now. It does not emit any green houses gases as conventional hydrocarbon generated plant. Greenhouse effect has been another major issue apart from financial problem & terrorism that our civilization is facing now. Other innovative, is the battery technology. If such innovative is successful, and by apply such technology into cars and trucks on road, in US alone, you can save up 9.5 million of gasoline consumption and 2.5 million of diesel consumption daily on highway alone. If the new innovation of battery technology with alternative green energy can emerge in major way, soon, human race will be no longer rely on "black energy source". Could that be a euphoria realistic future or just a pipe dream? Only human race can answer that question with proper initiative actions.


Monday, 25 October 2010

Market Oriented or Government Oriented


On September 2008, the most major financial breakdown in the history broke out in United State. Numbers of blue chip company has filed for chapter 11. Lehman Brother had fallen during pre-financial crisis hit. Bear Stearns had been take over by JP Morgan at 2 dollar a share. The America flagship financial system has finally created the biggest creative destruction tools in the market - derivatives. Since year 2000, financial institutions had been creative in selling myriad type of derivatives to investor, touting how easy the laissez faire market enable people to make money. It was a great marketing, and great success sales. The concept is selling orange juice from orange. CDS - credit default swap is the best exemplar in the concept. People can hedge against mortgage pool that they actually do not involve or own. The banks was happy, since premium coming in from the CDS, and they think that people are betting against something that will not failed. But as usual, the "invisible hand of Adam Smith" always at operation and its always works in the laissez faire market. Greed set in, and those financial institutions start to sell more "orange" in order to sell more "orange juice" to the market. People who are no credit record can buy 200k worth of property. Maids can suddenly owned 3 houses across the street. And the bubble is on the way to growth. Like the law of gravity, you cannot defy the law of natural. Tree could not grow to sky, that is the time it die and come back to the ground. The bubble burst. And panic set in. The financial market is not at the brink of collapse. The effect is market oriented. It is the burst cycle after the boom. Yet, human nature always defy the bad side. Claims on the imperfections of market oriented economy system is the major factor of such break down. Too big to failed? Government then step in to prevent social economy problem. Government then start to bail out the problem company, or so called victim such as Citibank, BOA, AIG and GM. The new idea of save the bank and you shall save the market. But the truth is, once the money is given to the bank, the bank do not effectively liquid the fund to the market. They are on the path on protecting their own interest first before the market itself. Even on the time of recession, big bonuses are being paid out from those bailed out companies to their top executives. And, government again has to do something. More interventions are necessaries. New rules and policies is being imposed and restructured. Doff-Frank act was signed on July 2010 by president Obama to protect the consumers and investors in wall street. There are virtually no pure investment banking in United State after the event. Quota had been set on the allowable volume of derivatives. Transparency is the top priority. It is like everything you do or did, you need to ask for permission from the government. Capitalism had evolved into social capitalism. We had come to learn that central planned policies do not do any good to the economy growth. What is failed shall let it failed. What the government did is taking away the best lesson the market could learn during the crisis. They are in the sense of pushing the problem forward to the future generations. People are tend to repeat the same mistake because they know the government will save them. They never learn the lesson since they never actually fall down. Such manner of market behaviour will definitely bring the market to another crisis. The questions is, how many times the government can save it? And who going to pay for that?

Thursday, 21 October 2010

Impact of Malaysia Budget 2011 to Malaysia Economy Outlook


On 15 Oct 2010, Putrajaya had announced on the her finalized 2011 budget plan. Among all the announcements, the one that will have the major ripple effect to Malaysia economy outlook is on the EPF (Employee Pension Fund) a.k.a KWSP role on local and abroad investment project. Budget plans that related to the involvement of EPF are:

  1. EPF will undertake 10 billion Sungai Buloh development project
  2. EPF will be allow to invest up to 20% of investment of overseas up from its original 6%. This is the very first time government has allow GLICs to be more aggressively involved in private capital market
  3. EPF will join venture with UEM offer for PLUS Expressways at RM23 billion Cash
It mark that Malaysia Government has taking further step into intervene her free competitive market. The idea perhaps is adopted from John Maynard Keynes, Keynesian, whereby government intervention is needed in jump start a stagnant market to create jobs and spendings which what a market made of. However, the involvement of EPF will not do any good in jump start the market because EPF is a designated fund for retiree. It is a debt to be pay back to the people during retirement. The retirees who born on 1955-1959 which consist of more than 1 million in population will start to retire 2011. These retiree will start to withdraw their money from the pension fund. Assuming each retiree will withdraw RM50k; if my maths is right, 1 million retirees multiple by RM50k is equal to 50 billion Malaysia Ringgit. The hypothetical amount do not count immigrant which today made up quite a potion to Malaysia community. Since EPF will be putting up so much cash to its proposed project, how the fund be able to come up with the money to the retiree? The repercussion will either be simply printing more money (inflation), cut off or sell off investment in private market which will cause the stock market slump, or by increase taxes. Either one of it is very very bad for the economy.

Wednesday, 20 October 2010

Currency War Between China & U.S


There has been several claims by Washington that the recent economy calamity is cause by China RMB devaluation. The claim pointed that undervalue China RMB tend to create imbalance trade between the two nations therefore it is the primary cause to budget deficit in U.S. Recently, Washington, lead by secretary of Treasury Timothy Geithner has putting a lot pressure to China to increase the value of RMB. The U.S believe that will bring back a more healthy and vibrant competitive market, and balancing the widely gap of trade imbalance within the 2 nations as well internationally. Still, there are many controversy on the hypothetical theory by Washington. Taking a look at the condition of market from the perspective of economic study, there are more than just currency exchange problem. The creative destruction from the financial market - derivatives such as CDS are still prevailed and preferred by most investor might create another wave of financial breakdown. The interest rate are still all time low in record in most of the nations across the globe especially U.S that will flood billion and trillion of cheap debt into market therefore creating a ripple effect of big inflation wave which soon or later will hit the shore. Oil price is shoring as other commodities high price indicating the effect from flooding cheap credit to the market is become more serious. Government pension and social security plan that on the index of stock market with mandatory withdraw rule attached on it will cause a major break down in the market. Aging population which the younger worker are no long able to support the baby boomer age retiree will burden the society, taxes will sky rocket. Unemployment hit all time high record at prevalence of 9.6% in U.S. is the major problem. On the outlook of current economy condition, the low RMB actually is an buffer to the major impact of financial perfect storm that about to hit shore. Without the low RMB, there will be no more cheap products and services available in the market, therefore hyperinflation will prevail. The low RMB is a key factor in today market to "buy time" for all nation across the globe to prepare and restructure the financial policy in order to face the inevitable incoming real financial perfect storm. On Octorber 2010, China had announced that they will increase the flexibility exchange rate of RMB gradually, it shown for the very first time in human history after the 1929 financial disaster, human race are about starting to see a real financial prefect storm that might bring down the whole world economy in a major way.

Sunday, 17 October 2010

How Government Fiscal Policy Would Affect The Market

The government finally announce to reduce taxes and increase spending to create more jobs. It is a good news or the bad one. Most of us would probably think that is a tremendous event to celebrate. But, think twice, there are no free lunch in this world, at least in the world that we come to know.

First of all, we need to see everything in the perspective of economic. The economic is made of constant exchange of resource in the community - the market. The resource we refer to often are in the form of currency - paper money. The paper money now is called the fiat currency, which it is backed by the government which its value is direct affected by the stability of government. The currency flow from person to person, institution to institution, entity to entity to make our market constantly vibrant. The current will die if it does not move, same like the electric current. Therefore spending is a form of exchange which required source of income, method of payment and party to receive. Government primary income is coming from taxes - the source of income. And it normally spend in the form of incentive, taxes exempt, subsidize and government project that provide jobs. When government need funding from new project or subsidize the citizen in the form of tax rebate, they need source of income to support it. They either can tax the private sector or borrow money by selling bonds or by simply printing more money. Since if the government vowed not to increase tax and promise abundance of government spending for benefit of social, the only way to fund such vow is by minting more currency. Well, most of us would think, what is the problem with that? The problem is inflation. Imagine when suddenly paper currency flooded the market, everyone will suddenly have more currency to spend. Yet the supply of goods and services available do not increase at the pace of government is printing the money. The demand is more the supply, therefore price increase phenomena will likely to abrupt. It is exactly what happen during post world war 1 of Weimar Republic in German, 1990s financial crisis that swept across south America like Argentina and Mexico, and 1998 Asia financial epidemic. So, whenever the government is making such promise to win vote, they are in the sense of conspire to steal from your money by dilute the value of dollar that every single person is holding. It does not make any sense if you could have a million dollar but only can buy a bread.

Thursday, 7 October 2010

The Force of Globalization - The Invisibile Hand of Adam Smith


On 1776, the father of modern economy, Adam Smith promoting the laissez faire economy system, advocate the free open market system by far the most effective way to ensure, regulate and sustain the stability of the economy. The idea of "invisible hand" within the laissez faire market, which its force originate from the sheer will of individual inside the market to strive and act for self-interest, will automatically steer the market instability back to its stable state. Yet, the theory has been debated many centuries. Controversies had been raise by many new-borned economist after Adam smith age, such as Karl Max, John Struat Mill, David Recardo, Parson Malthus, John Maynard Keynes and Milton Friedman. Among many controversies that raised since 300 years ago, one issue that has been always be on the heat debate table is the government role in the free market system. The arguement of, "how can the market regulated and provide neccesary safety net without the government intervention?". From the market boom and burst since the golden age before War World I, post World War I, 1930s financial crush, Post War World II, 1970s oil crisis, 1989 recession, 1998 Asian Economy Epidemic, DotCOM burst on 2000s and the recent financial crisis originated by the "creative destruction" of financial instrumentations; many of those incident had provided anecdoctel evident fraud and rocketeering are the main issue of financial crisis to happen. Some participant that using the "loopholes" in the free market had reap adnormal high profit from the market system in exchange to putting a timer boom in the system. Therefore, government and politician to win vote, had taking such issue to interven the free market system. Protectionism, anti dumping, anti trust act become prevail in our new economy system. Yet, those intervention did not do much good to the economy, instead impair the economy growth. Especially in today globalization world that the system itself is made by the Adam Smith's invisible hand, liberal market need to be sustain. For nation that resist the invisible will jeapordize not only its own domestic economy but also its counter trading partners - other nations. Japan is the best exampler by far how deteriorating the impact of government intervention toward it economy growth. The globalization economy system is not perfect by its past performance, yet, the up and down of the market is the a nature of the economy made of. We shall not resist but to accept the nature of the economy by understand the economy, not try to change it. How can we fight the hand that is invisible? It is like fighting the gravity!