Crude oil price has been hovering around the US$70 level for the last three weeks. It has been over $50 a barrel for at least two year now. Whither crude price?
Experts on oil think that we have reached or are near peak oil i.e. the demand for oil outpaces production. What this means is that the day of cheap oil is over. Don't expect oil to be in the 20s and 30s range anymore.
The world is consuming about 84 milion barrels of the black stuff a day. It is expected to grow at a rate of at least 2%. No big new oil field has been found in this decade. Besides, some old fields have reached their own peak production. Hence, it would be difficult for supply to meet demand in a few years time.
What about alternatives? Alternatives like solar power, windmill, fuel cell technology and nuclear power all need oil in their construction / production. Also, oil is needed to power them. Biofuel also needs oil to produce and besides that, it is robbing the people of much needed food. Even Canada's oil sands needs oil in its extraction. It takes about half a barrel of oil to produce a barrel from the tar.
So what will happen when the supply of oil starts declining? One thing is for sure - oil price will go up further. A lot of adjustment will take place. The price of oil will reach a level where the alternatives become viable. There will be a more mixed use of energy.
Thursday, August 23, 2007
Sunday, August 19, 2007
Subprime mortgage woes
It all started with the bursting of the dotcom bubble. To stimulate the US economy, the Fed lowered its discount rate to 1.75% in 2001. That fueled investment and also comsumption. The housing market took off.
Developers were having a good time. They offered free money to purchasers for down payment. The mortgage firms were doing a roaring business. Everybody could and were buying houses - even the less credit worthy ones. Loans to this group were called subprime.
The investment firms gave the subprime mortgages a spin and created a derivative out of them called Collateralised Debt Obligations (CDO). The CDO is a leveraged instrument. This debt is then sold to hedge funds, banks and other investment houses.
The Fed increased its discount rate to 5.25% in 2004. This increased the mortgage payments. The inevitable happened. What goes up must come down. The housing market softened. Subprime borrowers started to default on their loan payments. This triggered a selldown on the CDOs. At its worst, nobody wanted the CDOs. As such, there was no market price for the instrument.
Redemption of the CDOs were stopped. Bear Stearns declared two CDOs worthless. A german bank was bailed out. This caused a world wide credit crunch. Central banks pumped in hundreds of billions to shore up liquidity.
Sentiment turned sour. The unwiding of carry trades caused a currency turmoil. Exchange rates swinged wildly. Share markets also got hit. Billions of wealth was destroyed. Everybody gets poorer. What a sad episode.
Developers were having a good time. They offered free money to purchasers for down payment. The mortgage firms were doing a roaring business. Everybody could and were buying houses - even the less credit worthy ones. Loans to this group were called subprime.
The investment firms gave the subprime mortgages a spin and created a derivative out of them called Collateralised Debt Obligations (CDO). The CDO is a leveraged instrument. This debt is then sold to hedge funds, banks and other investment houses.
The Fed increased its discount rate to 5.25% in 2004. This increased the mortgage payments. The inevitable happened. What goes up must come down. The housing market softened. Subprime borrowers started to default on their loan payments. This triggered a selldown on the CDOs. At its worst, nobody wanted the CDOs. As such, there was no market price for the instrument.
Redemption of the CDOs were stopped. Bear Stearns declared two CDOs worthless. A german bank was bailed out. This caused a world wide credit crunch. Central banks pumped in hundreds of billions to shore up liquidity.
Sentiment turned sour. The unwiding of carry trades caused a currency turmoil. Exchange rates swinged wildly. Share markets also got hit. Billions of wealth was destroyed. Everybody gets poorer. What a sad episode.
Wednesday, August 1, 2007
Wrong Watts
For years they have talked about supplying electricity from Bakun to west Malaysia. Just last month there was news of plans to set up a factory to produce the undersea cables needed to connect Bakun to the peninsula.
Suddenly, someone from SEB comes up and says that the 2400 MW Bakun would not be able to meet the energy needs of Sarawak when it is completed in 2010. Further, he thinks that Sarawak needs another 3 Bakuns by 2020.
How did everybody get the watts so wrong. Or did the situation in Sarawak changed so fast and so drastically.
In the same breath, this guy also talked about exporting electricity to Indonesia, Brunei, Sabah and yes, West Malaysia. Makes you wonder if it is just a lot of hot air.
Suddenly, someone from SEB comes up and says that the 2400 MW Bakun would not be able to meet the energy needs of Sarawak when it is completed in 2010. Further, he thinks that Sarawak needs another 3 Bakuns by 2020.
How did everybody get the watts so wrong. Or did the situation in Sarawak changed so fast and so drastically.
In the same breath, this guy also talked about exporting electricity to Indonesia, Brunei, Sabah and yes, West Malaysia. Makes you wonder if it is just a lot of hot air.
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