Monthly Archives: June 2008

Black Gold

With the price of oil hovering around $140 per barrel, the commodity boom can no longer be ignored.

The price of oil is one area where I have been consistently mistaken and dumbfounded over the years. When it first peaked to $60 back in 2005, I openly told friends that I thought it would fall within the year. I even went so far as to investigate options for betting against its continued rise.

Mistakes are human and, though humbling, they are also one of life's gifts because they give us the opportunity to learn.

In the case of oil, what I missed over the last 2 years was that contrary to my naïve intuition, which suggested that oil would be mean reverting like other asset classes, oil's rise is being driven by at least a belief that the supply and demand dynamics have fundamentally altered.

Whether pointing to the industrialization and modernization of China and India, the excess consumption of Americans, or the growing global population, commentators have many options for identifying the "root" of a world where oil is demanded at a greater rate than even a decade ago. At the same time, with a rising Russia, a hawkish Venezuela, and an unstable Middle East, supply has become less certain. Furthermore, doomsday "peak oil" theorists have continued to clamour that we have reached Hubbard's Peak and that as a result we will literally start running out of oil sometime soon.

One reason I have continued to expect oil to decline is that I believe that the economics of scarcity is dynamic and reactive. In other words, I believe that technological innovation can help make previously scarce resources either obsolete (through innovative replacement), less important (through efficiency) or more abundant than we previously believed (through exploration and discovery).

I continue to believe that these factors will help to address the supply-side constraints when we look at the world's oil markets. However, the perhaps accurate market's assessment of the current future demand growth as well as the market's perception of supply issues have combined with the technical dynamics of the financial markets to create the rapidly increasing price of oil we have witnessed over the last two years.

This rise has been exacerbated by the failure of other asset classes, as investors have – like good sheep – chased the positive returns offered by commodities as other previous staples like real estate and financial companies have proved to be unreliable sources of income.

All of this leads me to believe that the price of oil will come down at some point, but given the difficulty in predicting the various factors influencing its rise (including the irrational behavior of herds) it is very hard to say when.

Now is truly a moment where the Keynesian axiom – the market can stay irrational longer than you can stay solvent – is being put to the test.

Positive side effects like a concerted (albeit sometimes insincere) embrace of alternative fuel technologies, a consciousness of consumption, and an awareness of our dependence on other nations make this situation more bearable than it otherwise would be.

However, the rising ticket prices at the airports may make $2.00 increase in gasoline prices seem insignificant as they threaten to slow down the very globalization that has driven demand to the point where it is today…

But then again, perhaps this is Mr. Smith's invisible hand and scarcity rearing its head.

Time will tell. Until then, enjoy your moped.

Sent via BlackBerry from T-Mobile

The Turmoil Continues

As if a surprise, The WSJ reported yesterday that those who were worried about CDO ratings at Moody’s (and likely the other agencies) turned out to be correct, and if those with decision making authority had listened to their warnings some of the ongoing market turmoil could have been averted.

This is surely correct in hindsight, and judging from the many commentators who anticipated the cracks in the credit system, perhaps one should shake a finger at those responsible for ignoring such pleas.

At the same time, it is difficult to predict the future with any consistency, and if the current market volatility and conflicting headlines tell us anything it is that a lot of smart people disagree about the next step in the cycle from this point.

One highlight of this increased uncertainty (besides the stomach wrenching moves in the major indices last week) are the massive volume increases in the derivatives markets over the last quarter as reported by Bloomberg here: Exchange Traded Derivatives Rise 30% to $692 Trillion, BIS Says.

The notional value of over the counter credit derivatives has now approached $600 Trillion, a number I cannot comprehend, but as most of you know, this amount overstates the impact this market has on investors as what matters are the fluctuations in this exposure. This equates to a lot of smart money vigorously disagreeing with one another.

My own take is that with the price of oil and commodities continuing to move up as the dollar continues to buckle, it seems very difficult to posit a scenario where consumers are not squeezed to the breaking point under these and credit strains over the coming months. In plain English: it seems that the real people underlying this financial mess will likely continue to have hard times in the short term which isn’t a good sign for those who make money by selling and financing stuff to them.

My eyes remained focused on technology, efficiency and mobility as innovation points to lead us forward out of these tough times.


As I stood in line this afternoon, waiting to pick up a prescription at Walgreens, the person in front of me joked: “which address, I have so many” as the pharmacist sought to verify the nurse’s identity.

When it was my turn, I scanned the memory to guess which of my various “addresses” Walgreens would have in its system. I guessed right, and thankfully I only keep one phone number so I was set.

But the experience stood out to me not only because I have been bouncing from city to city lately having arrived in LA for my summer job Sunday, but also because I think this relative “homelessness” is becoming more common across our society (including among humble billionaires: The Homeless Billionaire).

As the Internet allows us to connect and become more mobile while retaining the productivity and communication we require, I would imagine that such home-mobility will continue to become more common.

Maybe Walgreens should start asking for websites or email addresses…maybe the idea of “home” will continue to be de-constructed and become defined more by those we care about and share our lives with, than by wherever we may physically be located.

Don’t worry, mom, your cooking will always mean home to me. And Texas will probably be the State…at least until my imagination completely takes over.