For almost twenty years, woke interventionism has gone unchallenged. Big government brought economic stagnation, inflation, high taxes, and the destruction of the middle class. It is time to fight back.
Why are citizens feeling poorer when governments talk about economic strength? Years of increasing government intervention and printing currency have demolished the middle class with higher direct and indirect taxes and the hidden tax of inflation.
Most of the recent reports about the potential opportunity in Greenland and Venezuela focus on the large capital expenditure required, technical challenges, and legal security risks. However, markets may exaggerate the risks and underestimate the potential.
It is interesting to read that the United States should not invest in Venezuela and Greenland because they are high-risk, low-potential areas, but the same analysts find no problem in China and Russia developing those resources.
Continue reading Markets May Exaggerate the Risks of Venezuela and Greenland
20/9/2014 El confidencial
“Industry will gradually lose its competitiveness if this course of increasing subsidies is not reversed soon”, Kurt Bock, CEO BASF
Europe needs to exit the crisis through competitiveness and security of supply.
Europe must change an energy policy that has forgotten companies and households with the objective of being “the greenest of the class” without paying attention to costs and competitiveness.
European companies and families cannot continue to bear the costs of planning mistakes and subsidy generosity, because the situation is dramatic.
Europe’s energy policy has forgotten companies and households with the goal of being the greenest of the class.
In Europe, electricity costs are on average 50% higher than in the USA and in industrial gas, almost 75%. Between 2005 and 2012, thanks to the shale gas revolution, gas prices in the US fell by 66%, while in Europe they were up 35%. In turn, power prices in the United States fell by 4% while soaring 38% in Europe. It’s the difference between an energy policy that promotes efficiency and replacement through low costs, and Europe’s policy of promoting forced substitution through subsidies.
European companies are among the ones paying the highest prices for electricity and gas in the OECD. A German medium-sized industrial company pays twice the electricity tariff than a counterpart in Texas, according to Ecofys. The average of the Spanish industrial sector pays more than twice what the comparable US one.
The “green” policies and the development of renewables have allowed wholesale electricity prices to fall; while at the same time, adding fixed costs and subsidies, consumer prices have skyrocketed . For example, in Germany wholesale generation prices have fallen nearly 38% since 2005 and the average electric bill has gone up 60%. A mistake that destroys jobs and businesses that needs to be tackled. In countries like Spain we must differentiate wind power, which represents 20% of the energy generated in 2013 and 19% of the cost, from solar, which represents only 5% of energy produced and 20% the total cost of generation.
Green policies and the development of renewables have allowed the price of wholesale electricity down; but adding CO2 costs, fixed costs and subsidies, consumer prices have soared
The European Union is less than 14% of CO2 emissions in the world, but 100% of the cost. Interestingly, despite the green policies of the EU, the United States has reduced CO2 emissions since 2005 by 12% to 1994 levels, a more significant reduction than Europe’s.
All these problems result in lower industrial production, increased offshoring of companies, difficulties to compete and, of course, less employment.
For these reasons, the energy policy of the European Union must comply with the principles of safety, diversification and competitiveness.
Keep betting on renewables without passing the bill to businesses and families. Subsidies must be changed to tax incentives, as in the US. This prevents planning mistakes when estimating demand, subsidies and costs as the tax incentives are only provided when demand is real through agreements with consumers (PPAs, power purchase agreements). Every year I hear that solar will be competitive next year. And every time I hear it, the electricity bill goes up. After nearly a decade of subsidies, solar and wind technologies promoted by many leading European companies are competitive and at grid parity in some countries, without subsidies. To continue to demand subsidies in mainland Europe is at least suspect.
Addressing the problem of overcapacity . Europe cannot be “green” yet subsidize inefficient coal technologies, pay unnecessary capacity payments, or maintain excess capacity, with reserve margins above 17%. And all paid by consumers.
Replacement, not accumulation. Europe cannot allow new generating capacity when consumers pay the accumulated excesses. The new generation capacity has to come from replacement, and the change should be done at lower costs.
Addressing the problem of overcapacity. Europe may not want to be the greenest yet subsidize inefficient coal technologies hold unnecessary capacity payments, payments for unjustified subsidies interruptibility or maintain excess capacity … And all paid by consumers
Solving the problem of security of supply,developing local energy sources -shale gas, oil, renewables-, as well as improving interconnection between European countries to use “hubs” to reduce dependence from Russia and other countries, using the various -almost idle- storage facilities and regasification terminals.
Do not demonize technology in a regional and ideological way . Citizens should know that replacing nuclear and gas power with renewables would increase electric bills by three or four times. Remember that the average best price of renewable generation is today 68 euro/ MWh, “only” twice the wholesale price in Germany, and 30% higher than in Italy.
Electricity prices in Europe in 2003 were among the lowest in the OECD and today they are some of the highest. Why? Because the final consumer bill was loaded with all kinds of fixed concepts. In Spain more than 62% of the bill are regulated costs, taxes and subsidies. The European average is 54%.
Europe’s energy policy can not be about “not in my garden”. Pretending to eliminate nuclear power plants when most countries have a few miles, in France, dozens of nuclear reactors, is ridiculous. France has the lowest power prices in Europe and a safe, reliable and competitive nuclear fleet is one of the reasons why tariff prices have not soared. The other is that France did not jump to subsidize tens of thousands of Gigawatts of expensive renewables in early stages of technological development. As long as nuclear power is competitive, efficient and safe, Europe must continue taking advantage of it.
The challenges faced by Europe in its energy policy are enormous. But the opportunity is exciting, and the foundation to make Europe a competitive, self-sufficient world power is already in place.
Technology replacement should be achieved through lower cost, the same way as crude oil ended with whale oil . Not because it was decided by a committee, but because the cost was lower.
The mistakes of 2007 began with optimistic estimates of demand growth, with errors of up to 35%, and so it came to be the first time in history since the industrial revolution in which governments incentivised the most expensive technologies. Europe’s decision to substitute cheap energies for expensive ones have cost many lost jobs and industries.
Security of supply must be achieved, also, from a flexible and diversified energy mix which must be cheap and efficient. Not via subsidies, but through the tax incentives that prevent “fake demand signals” and prevent overcapacity.
Energy is the cornerstone of the future of Europe. Sinking competitiveness would likely worsen the crisis. Europe has the tools, using all technologies, to ensure an abundant and cheap energy supply. Anything else would bring it to repeat the mistakes of 2007.
Important Disclaimer: All of Daniel Lacalle’s views expressed in this blog are strictly personal and should not be taken as buy or sell recommendations.
This article was published in El Confidencial on 22/6/2014
“There is no military solution for Iraq” Barack Obama
“Rarely has a U.S. president been so wrong about so much at the expense of so many” Dick Cheney
Getting it wrong is dangerous. Worsening things is lethal. In the case of Iraq , the United States, after spending a billion dollars to remove the regime of Saddam Hussein, has left a global security problem which may be greater than imagined when Obama decided to withdraw the troops . It’s not just about oil. Anyone who lived the Baghdad of Saddam Hussein understood that the regime was a global danger. Similarly, it is essential to understand that the threat was not only Saddam, but the many factions that existed well before the Baath dictatorship, which remained in conflict during the regime and still do so today. Leaving Iraq can become a decision that Obama will regret for a long time.
Why did the U.S. leave Iraq?
For love and peace? No. Because in 2016 the US will be energy independent -including Canada. The need to defend its interests in the area is today infinitely smaller.
America is already independent in gas and produces 11.3 million barrels a day of oil thanks to the fracking revolution, becoming the largest producer over Saudi Arabia and surpassing the country’s own 1970’s peak.
However, removing the troops leaving behind a timebomb of sunni and shiite factions could end up turning against the United States and the OECD, as it generates an enormous risk of multiple terrorist threats. Energy is not the problem. It is a cultural problem. It is naive to say the least to think that everything will go smoothly leaving Iraq on its own when the country is decimated by clashes of tribes with invasive ambitions. it is the same mistake we have seen in Libya or Egypt after removing a dictatorship regime. The Pandora box of multiple threats opens. I recommend you read ” The Clash of Civilizations “ by Samuel Huntington and “The Lesser Evil” by Michael Ignatieff. In the West we do not want to understand the culture and customs of these countries, which are very far away from our idea of democracy. Accepting the lesser evil of maintaining a military presence is much more logical than closing our eyes in the hope that the world will move according to our wishes.
Does the Iraq crisis affect its oil exports?
The OECD placed too much trust on the unstable government of al-Maliki. US troops were disappearing and the industry seemed to be recovering. It looked as if everything was on track, but the risk had not gone away, in fact it had increased with the wrong strategic decision to pull U.S. troops from the country without a security contingent.
This week the Iraqi risk rose dramatically after terrorist attacks in the northern part from ISIS (Islamic State Of Iraq and Syria), a jihadist group that even has an annual report of its sinister achievements. See it here (http://azelin.files.wordpress.com/2014/04/al-binc481-magazine-1.pdf ) courtesy of the Financial Times .
When I traveled to Iraq people used to say: “Baghdad is a city covered in gold, but in the south is where the real gold is” (oil).
This map, courtesy of IHS Energy ( press@ihs.com ), shows the location of the main fields and refineries.
Terrorists have taken Mosul, the second largest city in Iraq, Tikrit, Tal Afar, and Dhiluiya Yathrib. However, they have not taken any of the large fields north of the country, especially the giant Kirkuk oil field in the Kurdistan region. the people I knew in the area called this field “the passport of Kurdish independence”. Today it produces 260,000 barrels a day. ISIS terrorists have no ability or desire to attack the Kurdish region.
Most of Iraq’s production, 80%, is exported and more than 77% comes from fields in the South, where terrorist ISIS militants cannot be measured with local forces and private security contingents. There has been no impact as of today in exports, which are made mostly through tankers from the South.
Is it a crisis to regain control of oil from the hands of the multinationals?
Contrary to what has been said in some press, oil in Iraq does not belong to international companies, much less American . All is state-owned fields where international, American, Russian, Italian, Chinese or British companies work with contracts for service , and they are paid to maintain or increase production. That is, the State benefits from international companies’ experience in improving productivity, and therefore has no interest in seeing these companies leaving. This type of productivity contract is what has led to Iraq recovering its pre-war peak production so quickly.
Is it all the fault of Obama or Bush?
The fights and attacks between Sunnis and Shiites are not new. It’s a conflict that has been ongoing for hundreds of years. In the era of Saddam Hussein it was already a challenge to organize security to travel from Baghdad to the border with Kurdistan. In fact, access was banned even for many potential contractors due to constant attacks.
George W. Bush made a mistake thinking that the US would be received as heroes after the invasion, as Wolfowitz expected. The moment that the regime’s repression ceased, the various factions began fighting bitterly. A weak government only reduced the perceived risk. The same mistake has been committed by the OECD in Libya and Egypt.
The Obama administration made a huge mistake by reducing up to three times the number of contingency troops that would support the weak government of al-Maliki. By reducing the promised figure of 50,000 soldiers to 25,000 and then to 3,000, aid became irrelevant, and therefore rejected by the local government.
The lack of involvement of NATO countries in the Middle East problem is part of the disaster. Not only Libya and Egypt have spiralled out of control, but Al-Assad in Syria is now more powerful than ever due to the inaction of the OECD, and Syria has become the launchpad of a strengthened ISIS in North Iraq. Thus, the risk that the area controlled by ISIS becomes a huge camp of international terrorists is not small.
Proposals to divide Iraq into three (Kurdistan, a Sunni North and a Shiite South) would increase the risk of allowing to build a huge training center for global jihadists.
Is the crisis due to peak oil?
Sunnis and Shiites have been fighting for hundreds of years. The problem is not oil … Because in the oil market there is no great risk.
On 11 June, OPEC met in Vienna. Independent analysis (BP Statistical Review) confirmed that there is plenty of oil for decades. Global proven oil reserves have increased to 1,687.9 billion barrels in 2013, sufficient to meet 53.3 years of global production.
Messages from the major oil exporters focused on some aspects that I think are extremely important when assessing the geopolitical risk and not overdo it:
Will Iraq take oil to $ 200 a barrel?
Not likely. The OPEC spare capacity is equal to 100% of total production in Iraq.With the US producing at record levels and non-OPEC production growing by 1.2 million barrels a day in 2014, the market would be adequately supplied even if Iraq fails to export.
Libya, for example, has dropped to almost zero exports from one million barrels per day after the fall of Gaddafi and the oil price has not moved aggressively. The analysis is not “oil has risen to $ 115 per barrel,” but “even after the crisis in Libya, Ukraine and Iraq, oil has only risen to $115 per barrel …” And oil remains in backwardation (the future price is much lower than the spot).
Will the price of oil it create an economic crisis?
Oil does not create crisis. Excess credit and money supply that shoots commodity prices well above the fundamental levels are the ones that create crisis. The price of oil is a consequence, not a cause. In any case, the oil burden of the OECD has not reached 5.5% of GDP, far from levels that are supposed “to trigger a crisis”. The oversupply also helps to mitigate it.
The world has been operating with such crises in producing countries for decades. And the market is always adapting. But linking the Arab problem only with oil is a grave error on the part of all governments.
In the end, as Ignatieff said there is never an ideal solution. To think that the OECD will solve conflicts between Sunnis and Shiites that have been going on for centuries only with military domain is optimistic. Believing that NATO and the United States will be able to opt out of supporting Middle East security without dire consequences for the Western world is suicidal.
Important Disclaimer: All of Daniel Lacalle’s views expressed in his books and this blog are strictly personal and should not be taken as buy or sell recommendations.