Tsunamic economics – what did Japan spend on seawalls compared to cost of tsunami?

March 26th, 2011

In some circles, there is a kind of lurid obsession with Japan’s nuclear woes that came from the tsunami. Obviously, it’s a PR and Financial disaster for the nuclear industry but in the grand scheme of things, not an environmental catastrophe – to date just one person has died, falling off a crane and a handful of workers have overexposed themselves to radiation. Terrible for them and their families I’m sure but how does that stack up against the estimated 15,000 non-nuclear dead?

I’m really surprised there hasn’t been much more discussion of the seeming failure of Japan’s massive investment in seawalls. Back in the 90s, when Japan started it’s long decade of Keynesian public spending, brand new sea defences received mountains of cash.

How much higher would this seawall have to have been to prevent this tsunami I wonder?

It was not high enough seawalls that failed to prevent the tsunami coming over them into Japan’s nuclear plants at Fukushima, Daichi and Dana and the location of their backup diesel generators at a low spot, as reported here;

The tsunami that followed the quake washed over walls that were supposed to protect the plants, disabling the diesel generators crucial to maintaining power for the reactors’ cooling systems during shutdown.

Peter Yanev, one of the world’s best-known consultants on designing nuclear plants to withstand earthquakes, said the seawalls at the Japanese plants probably could not handle tsunami waves of the height that struck them. And the diesel generators were situated in a low spot on the assumption that the walls were high enough.

That turned out to be a fatal miscalculation. The tsunami walls either should have been built higher, or the generators should have been placed on higher ground to withstand potential flooding, he said. Increasing the height of tsunami walls, he said, is the obvious answer in the immediate term.

You can’t seawall the whole coast but then you don’t have to – just focus on the really high impact areas. Spending on some extra concrete for a few more feet of walls for the nuclear plants by the sea surely would have been worth it.

Posted in Black Swan - extreme event, Security | 1 Comment »

2 Reasons for medium term optimism on oil prices

March 9th, 2011

Leaving aside environmental concerns around oil, I managed belatedly to find some grounds for optimism to balance my previous post. Ok, it’s only two reasons and they’re about the world in 2015-2025 or so, but that’s the best I could do !

1. Iraq – really surprised almost no one has picked up on this. Iraqi production is currently around 2.7m bpd but could well reach 9m bpd by the middle of the next decade. This will massively alter the balance of power in OPEC – the Saudis won’t be too thrilled – as Iraq is not part of OPEC’s allocation system. I picked this up in yesterday’s Wall Street Journal Europe in a section by IHS Cambridge Energy Research Associates – of Daniel Yergin fame.

2. Shale oil – the technology that revolutionised the US natural gas industry – hydraulic fracturing – is now coming to oil. Optimists are saying that shale oil production could cut US oil import needs by 20% within 5-6 years.

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Reasons for pessimism on oil prices

February 28th, 2011

Oil prices are going up, the economy is slowing down and Andrew Sentance says interest rates should go up – deja vu anyone?

I don’t share the pessimism of many about the revolts in Tunisia, Egypt and Libya. So what if it is somewhat directionless and entirely unanticipated – that part of the world has tried foreign rule, autocracy, military and religous dictatorships and found them all wanting. Virtually none of these protesters are crying out for a return to or enhancement of any of those systems.

It’s not a fashionable view, but I’m increasingly convinced that Francis Fukuyama will be proven correct that the end of history – i.e. that all paths will eventually lead to the least bad system – liberal democracy – because everything else is deemed to have failed. It is a question of time, albeit a long one.

Having said that, I certainly don’t share the optimism which seems a little too prevalent on oil prices and here’s why;

Optimist argument No. 1 – Libya is only 1.7% of world output and Saudi Arabia can easily close the gap.

Wrong for the following reasons.

The cut of crude that comes out from Saudi is high sulphur and harder to refine. Refineries are built to refine a certain type of crude and they can’t easily switch over.

Although oil is a globally fungible commodity, this has a highly regional impact because most of Libya’s exported crude went to Italy, Germany and Spain.

Even if Saudi cranks up production the oil will still have to be extracted, refined and transported. That takes time and would require a change of existing agreements.

Optimist argument no. 2. The IEA will release up to 1.6 billion barrels of spare inventory which will keep prices down.

Wrong again. If you reduce the cushion for supply disruptions by lowering reserves the market will price in higher risk and higher prices. The real question is who can lift supply and immediately? Answer – no one really.

Optimist argument no. 3. OPEC are sensible enough not to drive the world economy into recession and will quickly agree to lift production.

Even more wrong. OPEC have a terrible record of controlling prices – they can’t – and they are not slated to meet to discuss new quotas until June 2nd 2010 in Vienna. And that’s assuming that they would agree in the first place about what an acceptable price is and not cheat on their quotas.

This unrest also has long-term implications for the investment risk models of the sorts of long-term fixed capital projects needed to meet future oil demand. Typically it’s a 10 year gap between oil discovery and bringing it to market. I wonder how much money is going to be written off in Libya?

Of course, this is a one-sided post meant to take issue with received opinion.

I’ll be balancing it with a grounds for optimism angle later in the week.

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Back to earth with housing . . .

February 22nd, 2011

As the first UK-based think tank with a space programme, last week’s event we organised on the UK Space Economy created quite a buzz, more than a few tweets and some very interesting follow-on content about the Isle of Man’s burgeoning space services sector.  Thanks again to Jim Bennett for a superb talk.

So if you can forgive the pun, please watch this space for more to come.

In the meantime, housing – i.e. the price of it – is firmly back in the news again. House prices are a national obsession and so news that asking prices for homes in England and Wales jumped 3.1% over the past month made a big splash. Over the last few years, forecasts have been even more out of line with reality for housing than the big macro indicators – inflation, growth and unemployment. So what’s going to happen?

The paradox of the housing market is that almost unlike any other commodity, when prices start to fall, supply contracts as sellers take their properties off the market and start to rent them out instead.

The essential thing is to keep your eye on the big picture – here’s a chart that runs from 1985-2009

According to Rightmove, today there are 1.3 million homes for sale, but just 530,000 mortgages were approved last year. I really don’t see that improving over the next couple of years. I fear we still have a long way to go until the banks return to full financial health. And we’ll almost certainly never experience a 10 year doubling of prices ever again.

Posted in Housing, Space Economy | No Comments »

The emerging synergies of the New Space Economy

February 16th, 2011

News just published by Aviation Week that Astrium is teaming up with Singapore to build a suborbital demonstrator and hopes to ultimately have a fleet of spaceplanes stationed there speaks volumes about not just the audacity inherent in New Space, ambulance but the radical internationalisation and increasingly dynamic role of the private sector.

As the innovation accelerates and the costs fall, one can expect to see a lot more synergies involving – wealthy semi-microstates, billionaires, cash-poor state owned space agencies and dynamic private space entrepreneurs from all over the globe.

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Petrol going up, gas prices still falling . . . CNG vehicles on the way?

February 14th, 2011

Many British motorists are deeply unhappy about paying £1.30 per litre now for petrol and whatever they say, our politicians aren’t going to do anything about it. So what will be the market response?

The background to this post’s theme is that the supply of natural gas keeps increasing and the price is gently falling at a typically high demand part of the year. The decoupling of oil from gas prices, thought impossible a few years ago, has already happened in the USA and is starting to kick off here. And be under no illusion, the consequences are huge.

As gas emerges to become like oil, a globally fungible commodity, sold at the same price all over the world, new uses for natural gas are going to be found. Starting with high growth in Compressed Natural Gas (CNG) vehicles.  I don’t have the latest figures but it seems there were 7.8m CNG vehicles worldwide early in 2008 and 11.2m by the end of 2009. That’s what I call rapid growth. And Pakistan with 2.3m, Argentina with 1.8m and Iran with 1.6m vehicles are the unexpected leading adapters of this technology.

For the cash-strapped British motorist, there’s still some way to go though before we seem CNG refuelling stations like the one above and a flourishing cottage industry of CNG conversion garages. Not least in convincing policymakers that installing electric charging points for short-range electric vehicles all over the country with public money is going to be a lot more expensive.

At the end of last week, the US price per million british thermal units of natural gas was $4.22 whereas the equivalent price in Britain was $8.49.

Posted in Commodities | 2 Comments »

Shock Q4 figure have a small silver lining . . .

January 25th, 2011

It’s worse than we thought guv !

Today’s revelation that the UK economy contracted -0.5% in Q4 2010 was a sobering moment. Although not entirely suprising, as I discussed some months ago here and here. Quite apart from further highlighting the ongoing utter uselessness of macroeconomic forecasting which estimated a range of growth of between +0.1 and +0.6, I can see one positive outcome.

Interest rates are not going to go up any time soon. I never bought into the big Weimar-style inflation threat. If there’s so much cheap money around, why’s my bank offering me an overdraft at 10% when the base rate is 0.5%?

The rise in our inflation is not to do with QE, but principally stems from a market-driven decline in the value of the pound (thank God we have a floating currency), the additional rising cost of internationally priced, fungible commodities and our Politicians raising VAT – of which only the first we can control with interest rates.

And once those increases in prices have fed through, where do they think the inflationary wage spiral is going to come from?

With 2.5 million unemployed and many others underemployed, there are a lot of people looking for work out there, ready to work for much less.

On balance, I’m still more worried by deflation than inflation. And inflation hawks still have a lot to prove before they win the argument for large interest rate rises.

Andrew Sentance of the MPC will be feeling a little less confident now.

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Oil price outlook for 2011 – from $90 to . . . ?

January 5th, 2011

Oil prices – now at $90 a barrel – rose in 2010 by 15% and by over 8% in December. So as I explained today on Al-Jazeera TV, I’m not surprised that Faith Birol, Chief Economist of the IEA  is worried about the impact of oil prices on the (largely OECD) recovery. That’s because for now, oil is still the indispensable economic input, so you can’t cut it back, just spend more on it and  curtail expenditure and investment in other areas.  Put simply, higher oil prices are a problem in non-producing countries because they manage to dampen agregate economic activity  whilst being simultaneously inflationary.

OPEC is always walking a tightrope between the higher oil prices demands of its producers and finding a price low enough to suit mostly Western consumers without turning them away. Would that they know where precisely that balance was and even more, reach it !

And for all that, it’s not like they even agree amongst themselves – at the last OPEC meeting in December, the Saudi Oil Minister, Al Naimi, said he favoured an oil price of “$70 and $80 a barrel” whilst his neighbouring Kuwaiti confrere, Sheikh Ahmad al-Abdullah al-Sabah, today said he considered oil at $80 to $100 a barrel to be fair price. Is that just because it’s gone up in the meantime?

Anyone who asserts they know what the oil price is going to do is foolish in the extreme. But we can sketch out scenarios of what might happen. The first point is that OPEC are not scheduled to meet again to discuss quotas until June 2011. That may well change. The second is that some analysts believe that the US Summer driving season just might lift the price of oil to $120. And the third influence that outweighs everything else are extreme events like;

i) A Mideast War – involving Iran trying to close down the Straits of Hormuz in response to a US and/or Israeli attack

ii) A trade dispute between the USA and China – forcing China to revalue its currency upwards and thus effecitvely make oil cheaper (because it’s priced in dollars) and massively increase Chinese demand for the black stuff

iii) Tensions going hot between the 2 Koreas

iv) Some sort of collapse of the Euro – leading to mass selling of Euros and a retreat to quality – commodities like oil and gold

Hopefully, none of these will happen. But the risk is there and higher oil prices will come with them or even some inkling of their possibility.

One way or another, we do seem to have reached a new trading range – where $80 is the new $70 – as a recent note from Lombard Street Research made clear. Maybe next year OPEC leaders will be saying a fair price is more like $110 a barrel . . . Plus ca change !

Posted in Currency, Energy | No Comments »

We need Regional and Regeneration policy that creates Outliers

December 30th, 2010

I’ve just finished reading Malcolm Gladwell’s book, Outliers: The Story of Success – see you tube video below and Amazon video here which is a bit better.

And it’s great. In recent years, American academics seem to have discovered the knack of turning the vast quantities of usually dull academic papers they churn out into personal stories that the rest of us will enjoy reading. This book is no exception.  Gladwell targets the main myth of success – that people succeed alone – and totally dismembers it. No one ever succeeds alone. Amongst the many reasons why people succeed, lots of chance, family relatives and involuntary good timing tends to come a lot into it. And then of course the flipside to this work is to look at some causes for why people fail; cultural legacy and power distance to name but two. Once you accept all of that, here’s a passage that sums up what you should then do about it;

“To build a better world we need to replace the patchwork of lucky breaks and arbitrary advantages that today determine success”

All that being so, writing in the Yorkshire Post yesterday, I lamented the failure of regional policy to do what it says on the tin and how it has succumbed to the siren calls for supporting fashionable industries and moving work to the workers rather than the much cheaper and more effective workers to the work. Regional policy could be about enabling opportunities for Outliers rather than choosing White Elephants – exhibit A of which has to be this semiconductor factory in Scotland.

Posted in Government Efficiency, Real life economics | No Comments »

The diverging unemployment stories in the USA, Britain and Spain

November 9th, 2010

A couple of weeks ago, I was invited along with other youngish economics types  by the excellent Centre for the Study of Financial Innovation to a dinner with a top financial journalist. Macroeconomic forecasting is notoriously unreliable but I raised the question about why British unemployment (now 7.7%) hadn’t gone up anything like as much as anticipated with a 6% fall in GDP (about a million short according to Nadeem Walayat of Market Oracle) whereas US uemployment (now 9%) clearly had. What did this say about flexible labour markets in downturns when the UK’s was clearly less regulated in the early 90s?

There were several answers put to this from the speaker and around the table which I found fascinating;

Read the rest of this entry »

Posted in EPC Diary, Eurowatch | No Comments »

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