Quote of the Day

"I have to run now and finish the days work. I could get in trouble if I’m caught looking at anything that’s NOT porn during work..." -- in an email from a friend who works for Playboy.

Lots of Oil News Today

First of all, oil hit a new record high today. I realize this is news like "dog bites man" is news. Still, the closing June price of over $134 is a shocker. Nothing seems to be able to stop oil's rise. I feel personally responsible--I started commuting more than 50 miles round trip to work this week.

For a long time, there have been two schools of thought about high oil prices that get all the press. First are the peak oil guys. For them, the reason oil is expensive is that world production has in fact peaked, while demand is increasing. Half of that is undoubtedly true--demand is increasing. That doesn't mean that supply has peaked, though. This school of thought seems popular with apocalyptic hippies and haters of the modern world, like James Kunstler. Curiously enough, it is led by a guy that is pretty Republican, Matt Simmons. (At least according to the FEC--he's given a ton of money to what looks to be an almost exclusively Republican bunch of candidates and the RNC over the years, except for one weird donation to Barack Obama.)

The other school is the "speculators are causing all this!" school. This, weirdly enough, has mainly come from conservatives (who for some reason have an abiding belief that there is an infinite quantity of oil out there), but the most lucid explanation of it comes from Philip Verleger, who seems not to be a crank as far as I can tell. Some folks in the oil industry have supported this notion as well, perhaps as a way to take the heat off themselves. "Don't blame me--blame Goldman Sachs!"

Now in the middle are a bunch of people who say on one hand, how can we know if this is really peak oil until we see the actual production of oil drop? (After, Hubbert's model worked once, but who is to say whether that was not just a coincidence?) And on the other hand, if this is all about speculation, where are the speculators holding their oil? After all, oil is an actual commodity--you can't drive up the price without hording it. (Of course, as I suggested, it is possible to horde it by not producing it.) The sensible middle view is simply that the price of oil today and the future is expensive because demand is growing faster than supply, and has been doing so for years. James Hamilton at Seeking Alpha has a good explanation of this theory. It's basically what Martin Wolf and Paul Krugman said, as I mentioned in an earlier post.

But the new conservative rallying cry is that the reason that oil prices (and thus gasoline prices) are so high is because those dastardly environmentalists won't let us drill here in the U.S.! Initially the complaint was about ANWAR, then it spread to the Pacific and Atlantic coasts, and today all federally controlled land or mineral rights were added by the Bush administration to this wealth of American oil and gas denied us by feckless treehuggers. Expect to see some outraged blog posts and editorials from the right side of the spectrum about this in coming days.

But to say such a thing seems merely political, a way to blame high gasoline prices on liberals in the run-up to an important election. After all, Bush has been president for seven years, and for six of those years, his party controlled both the House and the Senate. And all during that time, the price of oil went up, and more American dollars were shipped overseas to petro-tyrants. If they really felt strongly about opening up federal land to exploration and production, they had six years to do it. It must not have seemed very important then. It seems hypocritical to start whining now.

(And lest you think I am some mere tree-hugger myself, let me add that I'm all for opening federal land up to exploration--as long as the feds get excellent royalties out of it. I don't think it would matter all that much in the short term though--Anadarko said "it has been producing as much gas and oil as it can given the limited availability of drill rigs and crews." This jibes with what I have heard from other producers as well. In other words, it would take a while for ANWAR and other fields to come on line, and by that time, demand and supply might have settled somewhat anyway--as high prices slow economies, slowing demand...)

Barnes & Borders?

A couple of months back, there was the news that Borders was considering selling itself. (Specifically it hired JPMorgan and Merrill Lynch to investigate options, including divestiture or acquisition). I didn't pay it much mind at the time.

Now it looks like Barnes & Noble is considering buying Borders.

Now as a book buyer, this is horrible. A lot of Borders (and B&Ns) would close as B&N would remove stores that cannibalize sales of the combined entity. B&N and Borders currently don't have identical stock--which is good. It means a browser like me can sometimes find something at one store that the other doesn't have. (If I don't get it first at Kaboom or Domy or Brazos Bookstore.) Combining them would inevitably mean less choice. And Borders is simply the better of the two stores in terms of bookselling, if not in running a business. So we could see a decline there too.

If I was still selling books, though, I wouldn't miss those trips to Ann Arbor and Border's charmless headquarters. It can't compare with B&N's location--right off of Union Square in New York.

Eat a Botero

Hat-tip to C-Monster. One of his (her?) commenters wrote, "you eat the botero, you become the botero!"

Rory Root -- One of the Greats

If you are into comics--especially those comics called variously "alternative comics" or "art comics"--you end up treasuring specific comic stores (and their owners/managers) for their quixotic support of this marginal subset of a marginal medium. Stores like Chicago Comics/Quimby's, Million Year Picnic, The Beguiling. And Comics Relief in Berkeley. I loved that store and its owner, Rory Root. And the funny thing is--I've never even been there.

I did see its simulacrum at the San Diego Comicon for several years. Root and his team would ship down the best of the store for that show, and it was a delight to visit.

He was one of the strongest customers of Westhampton House while it existed. He was friendly and accessible--a bit scary looking with his long stringy hair, snaggle teeth, beard, and wide-brim hat--the kind of nerd you wouldn't want to meet in a dark alley. (I could relate.) But I liked seeing him and chatting with him, and appreciated the hell out of what he did for good comics in his one little store.

Rory Root died yesterday after a long illness.

My Brilliant Representative

That would be John Culberson, 7th district of Texas. Marvel at the brilliant way he represents me and my fellow Houstonians in this video.



Here's a transcript (courtesy of Kuff):

John Culberson (R-TX): ...it contains provisions that have nothing to do with our troop's survival and safety in the field. To burden our troops with pork, with tax increases, with special provisions that have nothing to do with the war, adds to, I think, the obvious misuse of the process and I urge members to vote against the pork and support our troops.

David Obey (D-WI): I yield myself 30 seconds...I'd like the gentleman from Texas to point out a single piece of member pork in this bill.

Culberson: Does the gentleman yield?

Obey: Yes.

Culberson: Mr., Mr. Chairman, there's a number of un-un-unnecessary provisions in this...

Obey: Name one.

Culberson: Well, why are we separating out, sir, why aren't we just passing...

Obey: (nearly yelling) Name one.

Culberson: Why are we...

Obey: (yelling, finger pointing) Can you name one or can't you? The fact is there is not a single piece of member pork in this bill. You ought to...

(pounding gavel, "time expired")

Culberson: (inaudible)...why are we passing provisions in this bill with tax increases?

I thought, ok, maybe he's just flustered in a floor debate. So I went to his site to see what he specifically objected to in the bill.

Congressman Culberson voted “present” today on an amendment to increase taxes by billions of dollars to pay for more domestic spending and new entitlement programs. Entitlement programs already account for two-thirds of all domestic spending, and expanding these programs would only add to our record debt and deficits.

“The Democrats used the troop funding bill as a shell game to sneak 54 billion dollars of new taxes and spending past Congress. We have a responsibility to provide our soldiers with the resources they need to accomplish their mission in Iraq. Our military leaders on the ground have told Congress they need this funding by Memorial Day to sustain their progress, and we should honor their request.

“Republicans used the only legislative tool at their disposal to protest the unacceptable conditions that were imposed on troop funding by voting ‘present.’ Democrats brought this bill to the floor without a hearing, without amendments, and without any input from the minority party.

“The bill contains items that have nothing to do with the safety of our troops in the field. Muddying the bill with new taxes and spending is a blatant abuse of power and process,” Congressman Culberson said.

Yep, Culberson really doesn't say what he doesn't like about the bill, except for some undefined spending and some taxes. I mean, c'mon. Do you really object to this bill for some reason, or are you just being obstructionist? Have you even read the bill? If you truly have a problem with it, say what the problem is. Don't just wave your hands and cry "pork!"

Vote Skelly.

Is Peak Oil Finally Here?

I've always been skeptical of peak oil arguments. Not because I think they are irrational--on the contrary, oil is a finite resource, and we will some day reach a level of peak production and then eventually run out of it. The reason I recoiled from their apocalyptic certainties was that what has been happening the past few years seemed so similar to what had happened in the 70s and early 80s, prior to one of the greatest collapses in a commodity price in history. If you look at this graph (from the Financial Times), and look at the inflation adjusted line (blue), you first notice that we are now at an all-time high.

But to me what is striking is how low it got between 1981 and now. My brother and I have been discussing this for years now, and our assumption was that we'd see another mean reversion.

Obviously that hasn't happened, and it has led certain commentators who would not be inclined to be doomsayers to come out and say that if this is not "peak oil," then it at the very least is a real case of supply and demand setting prices, and not "speculation." Martin Wolf (from whose column I borrowed this graph), more or less believes we should set policy as if peak oil theory were true.

We are no longer living in an age of abundant resources. It is possible that huge shifts in supply and demand will reverse this situation, as happened in the 1980s and 1990s. We can certainly hope for that happy outcome. But hope is not a policy.

(He's so damn sensible, that Martin Wolf.) Paul Krugman takes a more strictly economic approach to analyzing the issue.

One of the things I find puzzling about the whole oil market discussion is how complicated people seem to make it. They get all wrapped up in stuff about forward markets, hedge funds, etc., and lose sight of the fundamental fact that there are only two things you can do with the world’s oil production: consume it, or store it.

If the price is above the level at which the demand from end-users is equal to production, there’s an excess supply — and that supply has to be going into inventories. End of story. If oil isn’t building up in inventories, there can’t be a bubble in the spot price.

Again, this seems really plausible. If you think of other bubbles, like the current housing bubble, or the telecom bubble in the late 90s, or the apartment bubble of the 80s, after the crashes you were left with huge inventories. That's because speculators were building inventory with the intent of selling high later. So massive numbers of apartments (and thousands of failed S&Ls), massive quantities of fiber optic cable (and Global Crossing, WorldCom, etc.), and now huge housing inventories (and the current MBS-driven liquidity crisis). But Krugman is saying oil is different--no one is hoarding it (except for the U.S. government, and they in quantities too small to count for much).

I am going to suggest, however, that there is hoarding going on. Maybe. Krugman makes a mistake in his analysis in suggesting that you can only store oil that's been produced. On the contrary, you can store oil that hasn't been produced. That's why proven reserves are assets. Now the important thing to remember here is that most oil in the world is controlled by national oil companies--companies like Aramco, Pemex, PDVSPA, Pertamina, etc.--or by companies that if not owned by the government, are closely tied to national governments, like Lukoil.

Now if a reserve is controlled by a big, publicly-traded oil company like Exxon, BP, or Total, they have every incentive to produce as much as they possibly can right now. They have a great incentive to turn those reserves into cash while the price of oil is its highest, rather than leave them in the ground. If shareholders thought Exxon was holding back, they would flip out--and probably sue.

But a national oil company has all kinds of reasons to half-step it on production. If a nation's income depends heavily on oil, banking reserves makes sense. Because when, say, Kuwait runs out of oil, it's going to turn into a poor country overnight, a new Nauru. So policies that put off that day might be prudent.

Now Matthew Simmons (king of the peak oil guys, and certainly no crank) and many others say that, on the contrary, OPEC nations are producing at full capacity, and furthermore they are lying about their reserves. He knows more than I do--my speculation that oil producing countries are not producing as much as they could is just that (although I will offer a few supporting arguments below). But I do think he makes a mistake about their motives. He believes that the Saudis are overstating their reserves, and points to their lack of transparency as one reason for his suspicions. But why should an oil producing country be transparent? The actual size of their reserves is of strategic importance to them, so one can imagine many reasons why a country might want to understate them and keep the real number hidden. Again, their motives are quite different from a company like Shell, which is motivated to overstate its reserves for financial reasons. Saudi Arabia doesn't have to worry about its share price like Shell does. But it does have to worry about keeping its people fed and happy 25, 35, 45 years from now.

So lets look at Mexico and Venezuela. Pemex and PDVSPA are infamous for being inefficient at getting oil out of the ground. Now if Mexico and Venezuela were really interested in producing as much oil as physically possible right now, they could simply hire Exxon or Chevron or Total to do it for them. But not doing so, aside from the nationalist political benefit, keeps some oil in the ground to be retrieved in the future. This is what I'm talking about. Venezuela is using incompetence to hoard oil.

Who else is hoarding oil by not producing it? The United States. We have reserves controlled by the federal government that are not being produced, particularly ANWAR and the fields off California. And we're not the only ones.

I'm not trying to say that deliberately slow production is the sole reason for rising oil costs. Increased demand actually exists, and every barrel produced depletes some reserve somewhere by one barrel--and the cost of producing additional barrels keeps going up. But slow production and non-production has some effect on current prices.

I don't expect a correction quite like what we saw in the 80s. But I do think a combination of new technologies, new production, and economic slowdown will cause the price of oil to drop--eventually. But it will likely go up before it drops.

Beautiful Cars, Ugly Cars

This is sad news. I'd call it ironic, but that seems callous. The accident didn't have anything to do with art cars at all. Just a drunk idiot behind a regular old Pontiac.

Tom Jones, the curator of the Art Car Museum, drove Swamp Mutha by Ann Harithas (below) in the Art Car parade Saturday for the last time.

Graduating, Art Cars, and Michael Skelly

At the risk of alienating my already tiny cohort of readers, I'm going to get all autobiographical on you. Today I graduated from Rice for the second time, earning my MBA. Last time I graduated, I didn't do the ceremony. This time, however, I decided to go for it, despite the requirement that we sit in the sun for three hours. Brutal, but I'm glad I did it.


These are some of my fellow MBAs, lined up under the arches of Lovett Hall as we were being led to our seats.

Former Rice University president George Rupp gave a moving address on the responsibility of students not to be wrapped in their own worlds, and to take a more global view of themselves and their country. The country he was referring to was the U.S., and he addressed the fact that the reputation of the U.S. has been squandered over the past few years in the eyes of friends and foes alike around the world. It was ironic, though, considering how many Rice students are from overseas. In a way, they weren't the intended audience, and yet they heard the message too, and in probably quite a different way than the American-born students.

When the master of Weiss College asked all friends, family, and alumni of Weiss to stand, I stood and was filled with pride.

Afterwards, feeling that we hadn't sweated in the sun enough yet, my sister Sarah and I popped on over to the Art Car Parade.


This is her in front of the Saint Arnold's beer car. (Saint Arnold's was founded by Rice MBAs, by the way.)

Democratic candidate for Congress Michael Skelly was working the crowd.



That's me on the left. Skelly has as good a chance as anyone has had for a long long time of beating Culberson for in the 7th Congressional District. It'll be a tough race--it's a very Republican district. But Culberson has been pretty terrible, and Skelly seems supremely qualified and appealing.