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.
Tuesday, July 17, 2007
NEP's role
So the gauntlet has been thrown down for the non-Malay leaders in Barisan Nasional to explain to their respective communities the necessity for having and supporting the New Economic Policy. Go ahead, explain in good details and as widely as possible. The people need to understand the policy fully.
You must be honourable in your political endeavour. You need to be transparent with the voters. Explain to them the NEP and tell them about your stand. If the voters believe in you and the NEP principles, they will vote for you. Don't keep the voters in the dark because you are afraid to lose votes.
As to whether the non-Malays accept the NEP now, the next general election will be the best test. If the non-Malay candidates win en masse, it testifies that the non-Malay communities support the NEP. However, if the non-Malay candidates fared badly, then the reverse must be true.
You must be honourable in your political endeavour. You need to be transparent with the voters. Explain to them the NEP and tell them about your stand. If the voters believe in you and the NEP principles, they will vote for you. Don't keep the voters in the dark because you are afraid to lose votes.
As to whether the non-Malays accept the NEP now, the next general election will be the best test. If the non-Malay candidates win en masse, it testifies that the non-Malay communities support the NEP. However, if the non-Malay candidates fared badly, then the reverse must be true.
Thursday, July 12, 2007
People too must be responsible for their security
V K Chin's Comment in the Star on 12.7.07 said that JB people expect policeman to be guarding every street or even every house. This, I don't think is true.
The security situation in JB was quite bad untill recently. Snatching of handbags, extortion of valuables, break-ins and rapes are quite rampant. The first two crimes are conducted openly and in broad daylight. I was in a police station reporting a snatch thief case some time ago. In the same room, there were at least three other people making reports on snath thieves. Isn't that bad?
I don't think JB residents expect the town to be completely free of crimes. However, when you don't feel safe to walk in the streets in town in the day, then there is a problem. We only want the police to be more conspicious so that would be crimminals are deterred from committing their crimes. Don't let them think that this place is lawless. Reduce the incidences of crimes.
The other aspect the police has to work hard on is solving the crimes. Bring the criminals to book. One criminal booked is one less on the street. The efficiency in solving the cases will also be a deterrent to other bad hats.
Increase the police force so that these two objectives are met. As to the actual numbers needed, the top management of the force should know. Mr. Chin cannot be of any help here too.
Self help is a good idea. Rukun Tetangga was implemented in the early 80s. However, it was found to be not too effective. Only break-in cases were reduced. Also, there is a cost involved in the scheme. All employees were given a day off after their overnight duty. The cost involved must have been found to outweigh the benefits and the scheme was stopped after some time.
The police cannot be in a no-win situation. They must always be in a win-win position. Otherwise, the criminals will rule and it will be a sad day for the country. Any success by the police must be appreciated. But, there should not be a case of a medal for each crime solved. After all, it is their job to look after security.
The security situation in JB was quite bad untill recently. Snatching of handbags, extortion of valuables, break-ins and rapes are quite rampant. The first two crimes are conducted openly and in broad daylight. I was in a police station reporting a snatch thief case some time ago. In the same room, there were at least three other people making reports on snath thieves. Isn't that bad?
I don't think JB residents expect the town to be completely free of crimes. However, when you don't feel safe to walk in the streets in town in the day, then there is a problem. We only want the police to be more conspicious so that would be crimminals are deterred from committing their crimes. Don't let them think that this place is lawless. Reduce the incidences of crimes.
The other aspect the police has to work hard on is solving the crimes. Bring the criminals to book. One criminal booked is one less on the street. The efficiency in solving the cases will also be a deterrent to other bad hats.
Increase the police force so that these two objectives are met. As to the actual numbers needed, the top management of the force should know. Mr. Chin cannot be of any help here too.
Self help is a good idea. Rukun Tetangga was implemented in the early 80s. However, it was found to be not too effective. Only break-in cases were reduced. Also, there is a cost involved in the scheme. All employees were given a day off after their overnight duty. The cost involved must have been found to outweigh the benefits and the scheme was stopped after some time.
The police cannot be in a no-win situation. They must always be in a win-win position. Otherwise, the criminals will rule and it will be a sad day for the country. Any success by the police must be appreciated. But, there should not be a case of a medal for each crime solved. After all, it is their job to look after security.
Saturday, June 23, 2007
The mighty Yen
Don't be mislead by the weakening exchange rate of the Yen against the other major currencies into thinking that the Japanese economy is doing badly. On the contrary, the Japanese economy is on positive growth. The weak exchange rate is just an aberration caused by the exceptional low interest rate in Japan. At the current exchange, the Yen is very much undervalued.
The official lending rate in Japan is only 0.5% - the lowest among the major economies. There is a substantial interest rate differential between Japan and the other countries, especially New Zealand. This has encouraged huge outflow of funds in so called carry trades. Japanese are, in droves, using margin accounts to borrow Yen and place deposits in higher yielding foreign currencies. This has caused the higher yielding currencies like the Kiwi and Aussie dollars to rise.
Hedge funds have also been borrowing Yen to invest in higher yielding assets like Chinese stocks. The unwinding of the carry trade on Chinese stocks was blamed for nearly causing a global market meltdown in late Febraury this year.
The Japanese government is expected to raise interest rates later this year. What happens when the local interest rate is deemed high enough and the Japanese start to unwind their carry trades. Will it cause a tremor in the global financial market. Lets hope that this unwinding will be done gradually and hence not cause too much of a ripple in the market.
The official lending rate in Japan is only 0.5% - the lowest among the major economies. There is a substantial interest rate differential between Japan and the other countries, especially New Zealand. This has encouraged huge outflow of funds in so called carry trades. Japanese are, in droves, using margin accounts to borrow Yen and place deposits in higher yielding foreign currencies. This has caused the higher yielding currencies like the Kiwi and Aussie dollars to rise.
Hedge funds have also been borrowing Yen to invest in higher yielding assets like Chinese stocks. The unwinding of the carry trade on Chinese stocks was blamed for nearly causing a global market meltdown in late Febraury this year.
The Japanese government is expected to raise interest rates later this year. What happens when the local interest rate is deemed high enough and the Japanese start to unwind their carry trades. Will it cause a tremor in the global financial market. Lets hope that this unwinding will be done gradually and hence not cause too much of a ripple in the market.
Friday, June 15, 2007
Makes no economic sense
This is one strange incidence where the government wants the manufacturer / retailer to increase the price of the good. Yes, I am talking about cigarettes. It is as though the cigarette companies are not making enough money.
The logic for the action is not very convincing. If the tax on a pack of 20 is RM3 and the companies are selling them at RM3.50 or RM3.80, very good. And if you want to set a minimum price of RM5 to discourage smoking, then just increase the tax to say RM4.50 per pack. Why force the tobacco firms to make extra profits.
The extra tax collected could definitely be put to good use. Public health services could surely use more funding.
If setting the minimum price of cigarettes too high would encourage smuggling, then you just have to tackle the smuggling problem. Beef up your anti-smuggling units and impose heavier penalty on those caught smuggling. You can't say you wouldn't increase the price of cigarettes because you are scared of the smugglers.
The logic for the action is not very convincing. If the tax on a pack of 20 is RM3 and the companies are selling them at RM3.50 or RM3.80, very good. And if you want to set a minimum price of RM5 to discourage smoking, then just increase the tax to say RM4.50 per pack. Why force the tobacco firms to make extra profits.
The extra tax collected could definitely be put to good use. Public health services could surely use more funding.
If setting the minimum price of cigarettes too high would encourage smuggling, then you just have to tackle the smuggling problem. Beef up your anti-smuggling units and impose heavier penalty on those caught smuggling. You can't say you wouldn't increase the price of cigarettes because you are scared of the smugglers.
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