June 2008 Archives

Getting the week going with some optimistic forecasts.

"Global economy faces deep slowdown and deflation threat, BIS warns":

The global economy may be heading for a far deeper crisis than is expected and a bout of deflation in the world's biggest economies is now a possibility, according to one of the world's most highly regarded economic institutions.
. . .
It [Bank for International Settlements report] warned that the sub-prime crisis in financial markets was merely a reflection of growing debt burdens in the developed world, which could soon contribute to a deep slowdown.

"The difficulties in the sub-prime market were a trigger for, rather than a cause of, all the disruptive events that have followed," it said. "Moreover... the magnitude of the problems yet to be faced could be much greater than many now perceive."

People (including high-ranking officials in the U.S. government have been suggesting that the worst of the financial mess is over. It's not. To that point, Lawrence Summers: "It is quite possible that we are now at the most dangerous moment since the American financial crisis began last August."

Futures Magazine has an interesting interview with economist Walter "John" Williams. Mr. Williams explains how government economic statistics, particularly the CPI, are misleading. If the government was using the formula it used in the early 80s, our economic picture would look much different:

[I]f you look at the number, net of these various methodological changes that primarily were made to boost the economic reporting or depress the CPI, you would find the inflation rate today, instead of being 3.9% year-to-year as of April, would be 7.3% if you look at the methodologies as of 1990; 11.5% if you look at the methodologies as of 1980. The unemployment rate, the way it used to be measured, would be up around 13% and the GDP would show we are in a recession.

Double-digit inflation and unemployment rates would certainly get people's attention.

This is also eye-popping:

Back in the 1980s, the big 10 accounting firms decided to set up a system so that the Federal government would report its financial activity the same way as businesses, with accrual accounting. Starting in 2000, the Treasury, under law, started publishing these generally accepted accounting principles statements on the U.S. Government signed by the U.S. Treasury Secretary and audited by the government Accounting Office (GAO). If you put in the year-to-year change in unfunded liabilities for Social Security and Medicare, the average deficit over the last four years has been about $4 trillion. To put $4 trillion into perspective, if the government were to seize all personal income and corporate profits, there would still be a deficit.

That is frightening because it means it is beyond containment. People in Washington know this, the Fed knows this and David Walker, who recently resigned as head of the GAO started to talk about it. Politicians won't address it because they don't have a solution. The 10-year note, certainly a 30-year bond, will have problems within 10 years on whether or not they are going to be paid off or what they are going to be paid off in. There are obligations that the government has no way of covering. When governments are in that sort of a situation, rather than renege on debt, the common solution is to rev up the printing press and you end up with a hyper inflation so you get paid off in worthless dollars. I think that is where it is headed.

Fun times ahead.

UPDATE: If that wasn't enough to dampen your spirits, take a dose of Mish.

Yesterday CIBC released a sober energy report. CBS News did a brief segment on it:

A few highlights:

Gas prices will soon hit $7 per gallon and that will make driving a car too expensive for millions of Americans, taking an unprecedented 10 million vehicles off U.S. roads over the next four years and dealing another body blow to the reeling auto sector, finds a new energy report from CIBC World Markets.

The report forecasts that continued growing global demand combined with ongoing supply challenges will see oil prices continue to rise and hit $200 per barrel in 2010. This will translate into further pain at the pump for motorists and businesses as the national average price for gasoline will approach $7 per gallon two summers from now.

That's bad news for most people, but particularly for low-income motorists.

"By 2012, there should be some 10 million fewer vehicles on American roadways than there are today - a decline that dwarfs all previous adjustments including those during the two OPEC oil shocks," says Jeff Rubin, chief economist and chief strategist at CIBC World Markets. "Many of those in the exit lane will be low income Americans from households earning less than $25,000 per year. At their current driving habits, filling up the tank will have risen from about seven per cent of their income to 20 per cent, an increase that will see many start taking the bus."

People will stop driving and begin looking for public transportation. Does our public policy reflect this? I see little evidence at the local level. To the contrary, we continue to spend millions on road expansion projects, while threatening to cut basic public transit service. Why will we need more highway lanes if there are going to be fewer cars on the roads? Why are we not spending money on transportation alternatives instead?

Something is wrong with this picture.

Recently I've heard rightists making some remarkable claims regarding the impact that future American oil exploration/drilling will have on current prices. They are trying to convert Americans' frustration with high gas prices today into support for long-term projects.

For example, I heard energy analyst/comedian Rush Limbaugh speculate if the United States merely announced that it was ramping up oil production, oil prices might immediately plummet $30/barrel.

Does such conjecture hold water? Commodity markets are very volatile, and I am very bad at predicting the future. But we need not look beyond this week's news headlines for evidence that such claims are wrong.

Last weekend Saudi Arabia announced that it is immediately increasing production (from existing oil wells) by 200,000 barrels/day. Moreover, it claims that it can increase capacity by 2.5 million barrels/day in 2009. [Compare that to estimates that ANWAR offers no more than 1 million barrels/day].

How have the markets responded to this news of increased supply? Have the supposed speculators been crushed, sending oil futures in a downward spiral? Not yet. Last Friday oil closed at $134 and today oil closed at . . . $134.

So if the near-term promise of 2.5 million barrels of Saudi oil generates no significant movement in oil futures prices, why should we think that the promise of 1 million barrels of American oil (in eight years) will take a big chunk out of gas prices today? It won't.

On 21 June 2008 I made good use of the longest day of the year by completing my longest ride of the year--my fourth Cherohala Challenge.

The day started early. I left Knoxville at 5:45 am and arrived at Tellico Plains, TN, a bit after 7:00 am. This year the Challenge moved its start/finish location from Tellico High School to the Tellico Plains Visitor's Center. The new staging location worked out well, though I didn't care for all the flies buzzing around during the outdoor post-ride meal.

This year I rode the Challenge with NealH, a cyclist from Raleigh who I met on an earlier event.

The first 20-mile leg of the route to Vonore, TN, is a gently-rolling mix of quiet country roads. It's nice terrain to get warmed up on in the early morning sunlight.

Starting off in Tellico Plains

Early morning mist on the plains

A quiet Monroe County road

Monroe Country: America's breadbasket

We stopped briefly at the first rest stop at Vonore. Then it was a couple miles along US 411, riding through Vonore and over the lake. 411 is a main highway, but there's a wide shoulder available, if you don't mind dodging debris.

A heavy police presence on hand to deal with traffic chaos in Vonore

Crossing Tellico Lake

The route leaves 411 and heads east on TN 72. There are a few more rolling hills to contend with, but the terrain remains easy. We encountered very little traffic on this road.

Along TN 72

Heading to the mountains

The course joins US 129. There's an up-tick in motorcycle traffic, with several miles of flat riding along the lake.

Chilhowee Lake

After about 10 miles, U.S. 129 heads up into the woods in a section frequently called the Tail of the Dragon--made famous due to its 318 curves in 11 miles. It's a unique place to ride; unfortunately the experience is marred by the heavy motorcycle traffic--particularly by the riders who treat this as a personal race track. Luckily, there didn't seem to be as many a-hole bikers out as there were last year.

Posing at the Calderwood Dam overlook

One of the 318 curves in the Tail of the Dragon

Real bikers and motor bikers mingle along the Dragon

Cyclists refueling at rest stop # 2 at the end of the Dragon

Deals Gap at the Tennessee/North Carolina state line

After the Dragon, US 129 descends sharply past Cheoah Dam (made famous from a scene in The Fugitive), then follows the quiet Cheoah River gorge upstream (1%-2% grade) for several miles.

Cheoah ("Fugitive") Dam

Following the river upstream on Tapoco Road

After rest stop #3, the course turns onto Joyce Kilmer Road, an extremely secluded road that skirts Santeetlah Lake. There's a few short climbs in this stretch--just enough to give you a taste of what's ahead.

At Challenge mile 70, the route turns onto an access road and begins an unrelenting 12-mile climb. Much of the ascent is at a 6%-7% grade, but there are stretches of 8%-9%.

The long climb begins

View where the route turns onto the Cherohala Skyway

If you like climbing, the Cherohala Skyway is a great road for riding. Traffic is light, the pavement is good, the grades are challenging, and the scenery is spectacular.

Fortunately, it was relatively cool and mostly cloudy during this ride. Climbing this road under a hot sun can be brutal. The only downside to conditions was that the haze hampered visibility of the surrounding mountain ranges. The pictures here don't do the Skyway views justice.

Along the Skyway

Self-portrait climbing at 6%

Neal rolls into rest stop #4

The Madone takes a break from climbing

At the top of the Cherohala Skyway (rest stop 5)

It's a great feeling to reach the top. I sat there in a pensive mood for a while, soaking in the experience.

Most of the last 30 miles is downhill. Some of it is very fast. You want to be sure your brakes work well on this slope. But there are three or four short "sawteeth" climbs along the way, lest your legs want a bit more punishment for the day.

Mountain haze

The Tellico River

Neal and me after the post-ride meal

I really enjoyed this year's ride. The weather was good, the climbing was good, the traffic was good, the road surfaces were good, the support was good, the company was good, and everyone around seemed to be in a good mood. I'm already looking forward to doing the Cherohala Challenge again.

Ride stats

Distance: 113.8 miles
Riding time: 7:28

UPDATE: NealH posted more ride photos here, here, and here.

I was not at all surprised to see Senator McCain flip-flop with yesterday's announcement that he now opposes the federal moratorium on offshore oil drilling. I expect more politicians to follow this path as public pressure to do something about the energy crisis builds. A majority of Americans will apparently tolerate being in Iraq forever or skyrocketing health care costs (as long as their employer continues to pay for insurance), but they will not tolerate a $1+ increase in the cost of a gallon of gasoline.

So I think it's inevitable that America will eventually be drilling for oil off the coasts, in ANWAR, and anywhere else oil is found.

What will be interesting to see is who or what the next energy scapegoat will be. Currently, rightists are blaming environmentalists for high prices. Let's say policy is changed and it's full speed drilling ahead. If this move does not make a significant dent in prices (and I doubt it will), who will rightists then blame? The list of targets is growing shorter.

I haven't checked the presidential candidate's schedules, but I hope Senators Obama and McCain are planning to take vacations this summer--preferably at the same time. And I'm not just talking about a long Fourth of July weekend, I mean like three weeks. If our current president can do it, these guys can do it too.

It will be good for them to kick back, reflect on where they want to take the country, and work on policy rather than giving speeches on it.

Just as important, it will give me a break from watching the TV news talking heads parse everything Obama/McCain said that day, supplemented with dueling campaign press releases.

That alone would make it worth it. And most voters probably wouldn't even notice they were missing.

Despite the media focus on gas prices this year, it's apparent that many consumers still don't understand the root cause of skyrocketing oil prices. That is to say, they don't comprehend the dynamics driving energy supply and demand.

NPR recently had a segment in which it interviewed drivers at a gas station. Comments gathered reveal the misconceptions:

Until people band together and cry 'foul,' prices will just continue to go up. And I guess the government says how much are people going to take and who cares.

If protests were an effective means to stop price increases, it wouldn't be hard to get one started. Unfortunately they aren't. The market is driving the price increase--not, as this comment suggests, the government. The only thing the government can do to lower prices is to increase subsidies--which would only exacerbate the problem by leading to shortages.

Everybody should just not drive for a week and see what happens, all around the country. . . . We got to be smart, we got to beat 'em at this.

What would happen? Well, the economy would crash; but if it's any consolation I'm sure gas prices would temporarily dip with due to the resulting inventory buildup (assuming oil industry workers still went to work). It's unclear to me who would get "beat" by this cunning plan.

I suppose consumers can be forgiven for their misconceptions when you consider the signals coming from the top. Consider the energy "solutions" being offered by Congress. The Democratic party just tried to sell a tax increase as a magic wand to right the supply/demand imbalance. Most Republicans are acting as if increasing global supply by one million barrels/day in eight years (ANWR) will be the answer for 10 million more barrels of demand (at current growth rates).

Even the "experts" who are paid to analyze oil markets can't seem to figure out what is happening:

Two of the world's most closely watched energy forecasters on Tuesday slashed predictions for output from oil fields outside the OPEC cartel in 2008 -- more bad news for a global economy struggling with record high oil prices and tight supply.
. . .
The International Energy Agency, adviser to 27 industrial economies, cut its expectations for supply growth from countries outside OPEC to 460,000 barrels per day above 2007 levels, down from 680,000 bpd a month ago.

The U.S Energy Information Administration, the statistical arm of the Energy Department, cut its forecast for non-OPEC output growth nearly in half to 310,000 bpd from 600,000 bpd.

For several years these organizations have continued to over-estimate production and thus have missed badly on their price targets:

Partly due to the dearth of supplies outside the Organization of Petroleum Exporting Countries, the EIA raised its projections for 2008 oil prices by nearly 12 percent. Benchmark West Texas Intermediate oil prices will average $122.15 a barrel, up from its previous forecast of $109.53 a barrel, the EIA predicted.

This is but the latest upward revision. One would think that after getting burned enough times, they would be more conservative on their production estimates. But it's a slow learning curve.

The fact is that oil production has barely increased since 2005, while demand for oil continues to grow. And there's really no way out of this jam. New oil fields being brought online are barely keeping production ahead of the depletion rate in older fields. Protests aren't going to create more oil. Government policies aren't going to generate more oil.

The only way to ease the pain of the global oil crisis is to drastically reduce our need for the product, through conservation and development of alternative fuels. As the NPR segment illustrates, many people don't yet understand this. The sooner they do, the better. Government, media, and energy industry leaders all share the responsibility of educating the public regarding the limits of our energy resources. Thus far they have failed miserably.

Here's a story on a group's intention to erect a giant Confederate flag near the intersection of Interstates 75 and 4:

The Sons of Confederate Veterans wants drivers in the Tampa area to see the massive flag -- 30 feet high and 50 feet long -- atop a 139-foot pole, the highest the Federal Aviation Authority would allow. It would be lit at night.

With the pole already in the ground and building permits in hand, the group is on its way to having what it calls the "world's largest" Confederate flag in place by mid 2009. The group just needs about $30,000 more, said Douglas Dawson, Florida division commander.

John W. Adams, a spokesperson for the group wishing to fly the flag, says this project is all about remembrance:

"It's about honoring our ancestors and about celebrating our heritage," he said. "It's a historical thing to us."

He hopes people who are offended by the flag will drive to the memorial and view the plaques honoring Confederate soldiers. They plan to have one dedicated to black Confederate veterans, he said.

The second paragraph gets at the real intent. If your objective is simply to honor your ancestors, you build a nice monument. But if your objective is to make a public statement and rile people up, you erect a giant flag.

This revives the long-standing flag debate: Is the Confederate flag merely a historical relic representing Southern heritage? Or is a darker symbol of racial division and suppression?

Obviously, many people who have rallied for the stars and bars--both today and in the 1860s--do not necessarily believe that the black race should be suppressed or enslaved. But the fact is that the Confederate States of America were fundamentally intertwined with the institution of slavery. Southern apologists can make arguments about "states rights" until they are blue in the face. But they can't escape the fact that without slavery, there would have been no Civil War.

And so to the extent that the Confederate flag represents that era in the South, African Americans are justified in being upset when it's used in this kind of a in-your-face-type display. Being of a libertarian/First Amendment bent, I'm somewhat conflicted over whether or not the government should step in and stop this flag. But clearly it doesn't advance the interests of society.

UPDATE: A segment on this controversy was broadcast on "Fox and Friends" on June 5.