How The Europeans Destroyed Their Economies

WASHINGTON – We all know that most European economies are doing poorly or very poorly. Indeed, in the new normal of perennial crisis, expectations are low. For example, what now passes as great news is that Spain, after years of horrors, recently recorded a 0.5% growth rate. This passes as a triumph, if compared to Germany at 0.1% or Italy at -0.1%.

Terminal decline

Still, whatever the dismal growth numbers, one thing is clear. This is not a cyclical down turn. Europe is in terminal decline. And it is not due to bad luck. This is the inevitable, cumulative, long-term  outcome of a set of disastrous economic and social policies.

If you want a terse and clear account of what went wrong, I urge you to read an excellent WSJ op-ed piece by Jesus Fernandez-Villaverde and Lee E. Ohanian, (European Economic Errors for the US to Avoid, December 30, 2014).

What happened?

So what happened? very simple. Europe’s remarkable post-war economic growth came to a halt when several “progressive” governments passed new laws aimed at increasing taxes and protecting currently employed workers. As the WSJ op-ed authors put it: “The result was a large drop in the number of hours employees worked, in business investment, and in the creation of new economic activity and the adoption and development of new technologies.”

Imagine the cascading effects of this trend. Little new investment led to little innovation, almost no productivity increases, and income stagnation. At the same time, the mostly unproductive public sectors kept on growing. Across Europe the share of GDP absorbed by the states went up. The cost of pension and benefits also grew.

Dismal returns on investments

Just one statistic illustrates the impact of this statist approach to economic management. According to the op-ed authors, in the US average venture capital returns is 13%, in Europe is 2%. And then you wonder why there is little investment in new technologies? If the legal and regulatory system in place creates too many constraints, whereby it is almost impossible to make any money by betting on innovation, no wonder very few are willing to invest. And no private investments in innovation and technology means stagnation, or worse.

The 2008-2009 financial crisis simply exposed the inherent weaknesses of anemic economies. Not every European country is like Greece. But most of them are closer to Greece than to Germany.

There is indeed a “free lunch”

This is not a matter of economics. In the end this is a matter of political ideology and psychology. The main European political forces have tried, with success, to sell voters the idea that there is indeed “a free lunch”. Of course it is possible to work only a little, get long paid vacations, and retire early with comfortable, inflation-adjusted pensions. “We can do all this and we will, if you just vote for us.”

Lessons for America

Compared to semi-comatose Europe, America is still doing fine. But we are trending that way, according to the op-ed authors. Too many regulations, an antiquated corporate tax system, and immigration laws that discourage talented people from coming into America conspire to reduce the number of start-ups and the amount of innovation produced and funded in America.

All this is reversible. However, if we continue along this statist path of hyper regulation and punitive corporate taxation, we should know the outcome. Just look at Europe.




Why Is the Islamic State Popular?

WASHINGTON – The NYT published a front page story on how American policy-makers are trying to understand ISIL, (Or ISIS, IS for Islamic State), in order to devise a strategy that will lead to its defeat. (In Battle to Defang ISIS, US Targets Its Psychology, December 29, 2014), The article is about the content of conversations obtained by the NYT. The main topic of these exchanges among senior military leaders is: “Why is ISIS so popular?” It would appear that military leaders really want to understand the root of ISIL’s appeal, so that they can combat the organization more effectively. This is not necessarily an idle or stupid question. But it is not as important as General Michael Nagata, the top US commander of American Special Operations forces in the Middle East, and the man asking the question, may think.

A winning dream

At the cost of appearing superficial, here are the wo reasons why ISIL is popular. The main one is that this movement (now trying to become a state) has resurrected –with some success– the concept of a militant, strong, pious Islam. This fantasy, as strange as this may sound, is selling well in parts of the Arab world that are confused and disconcerted after decades of corrupt and incompetent rule by distant despots.

The second reason is that, for the moment at least, ISIL is winning. And it is winning in large part because a distracted and incompetent American leadership did absolutely nothing as ISIL, from its bases in Syria, proceeded to invade and occupy 1/3 of Iraq, while the US-trained Iraqi Army melted away –without firing a shot.

Therefore, in large part thanks to these stunning military successes, we have now the convergence between the magic vision of an ancient and glorious Islam coming once again to life and the reassurance that its leaders must be right –because they are winning.

Totally irrational

In all this let’s be clear about one basic fact. This ideology justified through religious distortions is totally and completely irrational. This is a fairy tale, a dream. There is not one shred of fact based argument. ISIL does not have a political program. It is based on the political equivalent of a religious revelation that has to be carried out and implemented by true believers. None of this makes sense to rational people. But it does not matter. ISIL does not appeal to reason. It appeals to emotions. And, by the way, this is certainly not the only example of irrational ideas that appeal to large masses who then act to realize “the dream” causing all sorts of troubles.

The 9/11 hijackers

On a different but related level we have the 9/11 hijackers who plunged the airplanes into the Twin Towers. Were they motivated by something that we can call a real world political objective? Did they really think that by destroying a couple of buildings and killing a few thousand Americans they would have also killed America? 9/11 was a shock and a tragedy. No doubt about it. But it did not accomplish anything of lasting value for the Islamic cause. And yet the 9/11 hijackers did it anyway. They killed themselves believing that their death would help the cause. An irrational belief that did not lead to anything except for some destruction and the killing of innocent people.

Hitler’s dreams

And farther afield, did Hitler’s megalomaniac fantasy of the “1000 Years Reich” in which the Arians would rule over inferior races make any rational sense? No, it did not. But it appealed to the emotions of a large segment of a defeated, disoriented and depressed Germany. The blend of nationalism, anti-Semitism and anti-Communism all presented in a splendidly arranged choreography of mass events was enough to motivate millions, especially young people yearning to believe in something truly big.

Communism as salvation

And before Nazim there was Communism. Although sold as “scientific”,  the vision of a harmonious socialist society that would follow a glorious proletarian revolution was a complete fantasy that could never work as advertised. And yet this dream captured millions across the world, even though its appeal was totally irrational. Communism was a dream of salvation disguised as a political project.

Winning is important

True enough, the fact that because of persistence, luck (and the stupidity of the White Russian generals) the Bolsheviks won the civil war and seized power in Russia mattered a great deal. This first victory of Socialism was the modern equivalent of a divine sign.

Among the believers it was obvious that the Communists won because they were on the right side of history. They were in fact fast forwarding a preordained historic revolution.

Again, all this is utter nonsense. And yet this very (and most destructive) nonsense for decades motivated communist militants, from Spain to China, and from Vietnam to Bolivia. Communism was the modern religion of human redemption through struggle. Again, its appeal was emotional. This was not a political plan. This was a catharsis, a millenarian vision. It was about the re-humanization of the oppressed and lost individual.

The dream of a modern Caliphate

Now, let’s fast forward to ISIL. Its leaders want to create a modern Caliphate. And, as far as this fantasy goes, they have accomplished something. They do control territory. This is like the Bolsheviks controlling a large chunk of Russia. Again, these military and political victories do matter, because they are reinforcing the credibility of this fantasy.

Therefore, I am not at all surprised that confused young people in the Arab world or in Canada, the UK or America may find this novelty that blends pious principles and just war extremely appealing. Going to Syria or Iraq in order to join the cause sounds really exhilarating. Much better than going to a bad school in Manchester and getting a low paying job. Joining ISIL is about glory, triumph and contributing to the manifestation of the true faith.

Nothing to understand

So, what is there to “understand” about any of this? ISIL, just as the Bolsheviks or the Nazis, do not belong to the rational world of politics and programs. This is a millenarian ideology, an ideology of salvation whose main feature is the glorification of gruesome, medieval violence as a perfectly legitimate means through which the believers can and will advance their righteous cause.

As it was impossible to have a “conversation” with a Marxist true believer, it is impossible to engage anybody who believes in this dream of true Islam in any meaningful “dialogue”, let alone convince them that they are “wrong”.

So, how can General Nagata fight this dream? Very simple. Hit ISIL hard, with anything he has. Destroy them. As I noted at the beginning, through its stupid inaction America allowed this aberration to gain ground. By gaining ground it gained legitimacy, You want to diminish ISIL’s appeal? Defeat its troops. Show them retreating. Show them surrendering. Show them powerless.

Right now this fantasy of the Caliphate has huge appeal mostly because would-be militants can see that there is success. ISIL is winning. And therefore it is assumed that its foundations must be good. But I am sure that, as soon as they will start losing, the magic appeal will wither, very fast.

At a different level, the only way to inoculate young people around the world and in Arab countries in particular against this ideological poison is not in trying to prove through rational arguments that creating a new Caliphate is a bad idea. The only way is to create better and really viable alternatives.

America did not buy Marxism

It is not an accident that, with few exceptions, America was not penetrated by Marxism. It was immune because the American values founded on individual freedom and freedom of enterprise did not allow the Marxist myth of victimization of the working people to attach itself. Simply stated, very few Americans believed in the whole Marxist cosmology of blood sucking capitalists and oppressed working masses who will have to revolt in order to establish a just society.

Most Americans were reasonably convinced that their society allowed basic freedoms, including the opportunity to move up in the world through personal effort and perseverance.

Create an alternative

Which is to say that crazy ideologies like the beliefs espoused by ISIL will be defeated only by the genuine appeal of real world viable alternatives. This is the challenge.

In the short-term ISIL must be destroyed militarily. And this is not going to be easy if the US insists on using only a modicum of military strength in this fight. Most certainly, every day the ISIL flag flies it is a day of victory for its leaders. A rapid succession of stunning military defeats would do a lot to diminish the appeal of this crazy idea.

But in the long-term it is up to mainstream Muslim culture to come up with something real, modern and appealing. Until now, unfortunately, Arab societies have only produced kleptocratic despots. If this is the only viable alternative to fundamentalism, do not be so surprised when young people sign up with ISIL.




No Independent Judiciary In China

WASHINGTON – Western media are covering rather extensively the broad anti-corruption campaign now under way in China. Most recently, The New york Times had a front page article that provides vivid details about the prosecution of corrupt local officials and business people in the Luliang coal-producing region. 

Plenty of corruption

Corruption dominated almost everything there. Public positions were routinely sold. Friends and relatives of the powerful went quickly from obscurity to prominent positions. A coal baron had made so much money through illicit practices that he could afford to pay US $ 11 million for his daughter’s wedding. (US $ 11 million for a wedding? This looks a bit outlandish, but let’s accept it).

No surprise

All in all, there is no reason to be surprised by this level of corruption. When power is totally concentrated within a small, unelected and unaccountable elite of career functionaries, promoted only on the basis of loyalty, it is quite obvious that those who have great power will use it to enrich themselves by selling favors and by gaining control over money-making enterprises.

No fair trial

However, the fact that Xi Jinping, China’s new President and General Secretary of the Communist Party, is now very publicly pursuing corrupt public officials and their business friends provides only mild comfort.

There may be a genuine interest in “cleaning” the party by getting rid of the most egregious bad apples. Still, this process is carried out by the same unelected and unaccountable officials who participate in the spoils system. Are all corrupt officials pursued? Or only those who are not political friends?

May be some prosecutors are truly impartial. Still they all follow secretive investigative procedures. Indeed, sometimes the accused are held with no trial. Others simply vanish.

And, in case you wonder, there is no such thing as an “independent judiciary” in China. Trials are usually pro forma. All the accused are routinely found guilty.

“Modernize” the system?

Interestingly enough, the Chinese magazine Caixin Online recently published an editorial dealing with the need to “modernize” China’s judiciary, (Why China Must Build a Modern Judicial System, December 25, 2014).

The editorial does not focus on impartial trials for those now accused of corruption. It begins with a couple of known cases in which people accused of murder were convicted and sentenced, while it turned out later on that they were innocent.

Still, the general overview of China’s judicial system provided by the editorial, from which we glean that law enforcement authorities determine in advance who is guilty way before any trial is held, is quite revealing.

“Trials are a formality”

Here is an excerpt from the Caixin piece:

“[In China] all aspects of criminal cases, including investigation, prosecution and defense, should be carried out in a professional and modern way. This would be a change from the country’s current approach, which sees the judicial system function more like a factory’s production line.

The constitution and criminal procedure law say that courts, prosecutor’s offices and the police have their own separate jurisdictions, which in theory requires them to cooperate with each other and ensure the public a certain amount [Bold added] of checks and balances are in place.

In practice, defense lawyers have little power and prosecutors are seen doing little more than colluding with police. [Bold added]. This means the whole process gives far too much weight to law enforcement.

That has led some academics to liken China’s judicial system to a cozy restaurant, where the police are the chefs, the prosecutor’s office is the waiter and the court is the diner. In this metaphor, defense lawyers can only sit outside and beg for scraps.

As a result, the system is often troubled by convictions gained through torture, extra-judicial detentions and grave disregard of defense lawyers. The courts have thus become a hotbed of miscarriages of justice and trials are a formality. [Bold and emphasis added]

The party would like to change this so that trials are based on evidence and a suspect’s defense plays a central role. It has also clearly said that court officials should be held accountable and the judicial system must be allowed to be more independent. It also stressed that both plaintiffs and defendants have the rights to information in a case.

The party has also set out guidelines that allow for illegally collected evidence to be thrown out and for the principle of presumption of innocence to play a central role in trials. It has also proposed a way to hold to officials who interfere in a trial accountable because this is another reason for the country’s many miscarriages of justice”.

Reform will accomplish little

I appreciate the magazine’s deference to the party and its new guidelines. However, either there is a truly independent judiciary or there isn’t one. Is the Chinese Communist Party going to create and protect an independent judiciary? I doubt it.

In a country in which all power is concentrated within a small elite of co-opted senior leaders, some judicial system reform may be possible. But an independent judiciary –the only way to provide a guarantee of a fair trial– is only a dream.

The accused are always guilty

For sure, since right now the Communist Party needs to create a better image for itself, we are going to see more senior officials charged with corruption and sentenced, as the NYT story explained. And may be most of them are indeed guilty.

However, China’s judicial system being what it is, forget about anybody getting a fair trial.




Japan Headed Towards Disaster?

WASHINGTON – Unfortunately for Japan, smashing political victories do not translate into good economic performance. Prime Minister Shinzo Abe held a snap election and won handsomely, even though the turnout was small. Despite another recession caused by a collapse of consumer spending, it would appear that the voters have confidence in his strategy to revive the Japanese economy.

Abenomics is not working

And yet there is very little evidence that he is succeeding. He has helped exports somewhat by forcing a currency devaluation. But his consumption tax caused people to stop spending thereby freezing the economy.

Now he has suspended any further consumption tax hike, while his government just launched yet another stimulus package worth about US $ 29 billion, in the hope that this would spark some kind of new miracle.

However, based on past performance, it is unlikely that the economy will respond, while Japan’s truly colossal national debt, now at 240% of GDP, keeps growing.

The Bank of Japan is bent on forcing a currency devaluation in order to boost exports, while it buys all the new government bonds. How long can this go on?

Negative savings rate

In the meantime, the traditionally thrifty Japanese people have stopped saving. For the first time since 1955 the savings rate has gone negative, and it now stands at -1.3%.

In all this, the currency devaluation means higher cost for all imports. Of course, right now Japan is benefiting from lower oil costs, just like all other energy consumer countries. But a lower yen also means that everything else costs more. Real wages in Japan are not growing. And this means less disposable income and lower standards of living.

If this were not enough, please note that even with artificially depressed interest rates debt service now absorbs a staggering 40% of all government revenue. As debt keeps growing, interest on the national debt soon enough will swallow  almost all revenue.

If you want to add another touch of gloom, Japan is experiencing population decline. This means a shrinking working population that soon enough will have to support a growing number of elderly retirees.

Japan is in decline

So, here is the picture. Notwithstanding its coveted position as the number 3 economy in the world, (after the US and China), Japan has a declining population, and a stagnating economy with little prospect of new growth. The average Japanese has stopped saving. In the meantime, in just a few years the state has piled up a gigantic mountain of debt that weighs heavily on everything else.

Will more debt cure the country?

And what does Prime Minister Abe do to improve all this? He creates more debt, in the shape of the just announced US $ 29 billion stimulus package. Shinzo Abe may be a clever politician who knows how to win elections. However, with the active complicity of the Bank of Japan, he is doing his very best to steer Japan towards ruin, maybe even bankruptcy.

How much more debt can this anemic Japan withstand before the system cracks? I am afraid we shall find out fairly soon.

 




“Reef Balls” Help Rehabilitate Marine Habitat

WASHINGTON – We humans are unfortunately very good at damaging or destroying the world in which we live. Delicate and complex ecosystem that nature built over millennia can be compromised in almost no time by careless human activities.

Recreating coral reefs

Coral reefs are among the victims. However, here human ingenuity may help repair the damages caused by human carelessness or utter stupidity.

As we know, there have been many attempts to create a habitat for coral and other marine life, mostly by throwing into the oceans all sorts of discarded man-made objects.

“Reef Balls”

But now we have something better. Not long ago, I watched an interesting TV program illustrating the activities of the Reef Ball Foundation, located in Athens, Georgia, (www.reefball.org). As the name indicates, their work is all about man-made “balls” to be deployed on the sea floor, so that they will help nature in recreating a normal reef. These “balls”, (in fact, half balls), are simple and yet very ingenious objects that provide a modular solution to the problem of dead or severely damaged reefs.

Someone came up with an easy to make, extremely durable concrete structure –guaranteed to last 500 years– that looks indeed like a hollow ball, except that it is more like a half ball, so that its large base will allow it to rest on the sea floor. The clever feature is that this structure has several large holes, so that water, nutrients and fish can flow through it, while coral and plants little by little will cling on its corrugated, uneven surface.

A new reef in just 3 to 5 years

Well, the evidence shows that coral can easily attach itself to this man-made structure. Amazingly, in just a few years (3 to 5) an almost complete replica of a natural reef is created. You can place as many “reef balls” as you want on the sea floor. Soon enough they will “come to life”, playing host to coral, algae and fish.

The added bonus is that these reef ball are easy to make. The molds can be shipped close to the deployment area, near the water. Making the reef balls “on site” is a good way to reduce all the complex logistics of making the balls in one place, shipping them probably far away, and all the associated transportation costs.

Easy to deploy

Once the balls are ready, inflatable balloons are placed inside the hollow structures so that they can easily float until they reach the designated deployment area. At that point, with the help of divers, the balls are guided down, as the balloons are deflated.

Once the reef balls reach the bottom, that’s it. They are designed to stay there. They are heavy and stable, and so they will not be moved by currents or other forces. The holes will allow water to go through them. Their hollow interior will become a habitat for fish and other creatures.

A new reef

Over a relatively short period of time, the reef balls will become the home of new coral and plant life. This almost natural habitat will allow the replenishment of various species, contributing to the healing of many parts of our damaged Oceans.

This may not be perfect. Nothing beats mother nature’s physiological ways to create and self-perpetuate its own eco-systems. But, as far as man-made remedies go, this is pretty good.

More than 62 countries have reef balls

Reef balls have already been placed in more than 62 countries. Let’s hope that more and more people and organizations around the world will become aware of this ingenious way to recreate reefs.

Reef balls are cost-effective and easily deployable. And, just as intended, they create a new habitat for marine life.

 




Floating Homes Will Neutralize Rising Sea Levels

WASHINGTON – Those who warn us about the worst possible consequences of global warming predict that coastal areas around the world will disappear because of rising sea levels caused by  melting polar caps.

Rising sea levels

Yes, the image of coastal communities and even large cities under water is scary. But it is clear that not much will be done, at least in the near future, to stop or even cut down the use of carbon-based energy  –the main cause of global warming.

And this is simply because at the moment there are no good alternatives to coal, gas or oil, especially in emerging countries that desperately need energy in order to promote economic development. Which is to say that global warming is here to stay.

Floating homes?

However, this is not a hopeless situation. And this is because adaptation is possible. And here is a clever idea. Instead of relocating farther inland millions of people who may be threatened by rising sea levels, we can build entire communities on safe and cost-effective floating structures.

And this is exactly what Dutch architect Koen Olthuis of Waterstudio.nl has been doing –quite successfully– in the Netherlands and elsewhere. His motive is not necessarily to find a way to fight the impact of global warming. His main point is that building on water is a way to acquire new space for human usage, this way revolutionizing the way we think of cities surrounded by water. The added bonus is that, should sea levels rise at some point in the future, floating structures will not be threatened. They would simply adjust accordingly.

New cities built on water

According to Olthius, building on water is doable. There are no real disadvantages. In congested coastal communities, building floating homes and other structures that sit on water allows expansion, without giving up all the comforts and amenities that we associate with living in “regular buildings”.

Look, at some point we may indeed find a good alternative to carbon-based energy  –according to most the main cause of global warming. But, until we do, it seems that we can find ways to adapt to at least some of the consequences of rising temperatures.

Creative adaptation

Relocating millions of people into floating homes sounds expensive and complicated; but it is probably a lot easier than convincing 1. 3 billion Chinese and 1.1 billion Indians to give up coal generated electricity.

For the time being, the Indians and the Chinese really have no practical power generation alternatives. Whereas floating homes will allow people all over the world to adjust to a new environment.

 




Sustained US Growth Requires Quality Public Education

WASHINGTON – The American economy is closing 2014 on a high note. US GDP grew 5% in the third quarter. This is good. Jobs creation is better. Unemployment is down a bit, and disposable income has been boosted by slightly higher wages and substantially lower gasoline prices due to the global oil glut.

Good numbers, but not exceptional

Still, while all this is definitely good news, let’s not get carried away. Even with this rather exceptional 5% third quarter GDP growth, for the whole year the US economy is up 2.5%.

This is respectable; but not astonishing. If compared with a post-war 3% average yearly growth, this is barely OK. The fact is that what started in 2009 has been the worst post-recession recovery in recent history. There has been a slow upward movement, but no vigorous bounce.

Much better than Europe

The US economic performance looks positively great only if compared with dismal Europe or Japan. A 2.5% rate of growth looks amazing, in fact miraculous in countries that are either in constant recession or growing at 1%. But the sad story is that both Europe and Japan are declining economic regions of the world.

In Japan, even with interest rates near zero, debt service absorbs 40% of the entire state revenue. And this is because Japan’s debt is now a colossal 240% of GDP. Doing better than Japan, Greece, Italy or Spain is no great achievement.

Too many part-time jobs

Besides, can America sustain this 5% growth rate in the coming months? Probably not. The problem is low productivity and stagnant incomes. While lower unemployment is certainly good news, the fact is that far too many Americans seeking full-time positions can only find part-time jobs. This means only low income and no security. Again, far better to have some work than no work at all. But the reality is that millions of American are on really shaky economic ground, with very few prospects of any real improvement.

More innovation

The best way out of this relative stagnation is more innovation, more enterprises, and more high paying jobs created. There is no doubt that a good portion of the American economy is on solid ground. High technology, information and communications firms, biotechnology, robotics, electronics are doing well.

Bad public education

But much of the rest is doing only so so. In part this is due to the fact that for decades we have not done much to improve overall public education standards. Far too many young Americans, most of them minorities, get only a mediocre or really bad education. They have few marketable skills; and therefore their chances to get ahead in life are small.

Develop all human capital

America needs to do all it can to develop its human capital. In a very competitive global economy, the future belongs to societies in which there are many highly educated, talented, creative individuals capable of starting innovative enterprises.

This used to be America. But now it is no longer so. We have fallen behind. Millions of functionally illiterate teenagers cannot do much to take care of themselves, let alone help grow the economy.

We can do better

By all means, let’s rejoice looking at improved growth numbers. But let us not forget that the secret of sustained high growth is innovation. Let’s do our very best to develop to the fullest extent the intellectual potential of our large society. High quality human capital is what we need. Now and tomorrow.

Let’s pledge to educate all Americans. We do need all hands on deck.

 




Saudi Arabia Wants To Kill US Shale Oil

WASHINGTON – Saudi Arabia’s oil end game is to let prices fall and stay low for as long as possible in order to kill the less competitive American shale oil producers. It is clear now that Ali al-Naimi, Saudi Minister of Petroleum and Mineral Resources, is betting on Saudi Arabia’s ability to force high cost US shale oil out of the market.

Conventional wisdom about shale oil

Here is the conventional wisdom. Sustained high oil prices encouraged American companies to exploit US shale oil deposits. This new US produced oil means less oil imported from Saudi Arabia.

While shale oil profit margins would not be huge, (extracting oil from shale is much more expensive than getting “conventional oil” in Saudi Arabia), as long as oil stayed at around $ 100 per barrel, the Americans could sell their crude at home, make money and displace Saudi imports.

But if oil prices went below $ 80 or $ 70 a barrel,  there is no way that US shale producers could stay in business. Their production costs are just way too high.

Therefore, since Saudi Arabia’s production costs are much lower, it is smart to squeeze the new American competitors out by forcing oil prices down through over supply. Saudi Arabia still makes money with oil below $ 60 a barrel. But the Americans would not be able to stay in business and will be killed. Therefore let’s produce at full throttle, inundate the markets with excessive supply, and let prices go down and down. Unable to make any profit from their expensive oil, the US shale oil producers will simply go out of business. Saudi Arabia this way will regain its lost US market share.

What is the Saudis are wrong?

But what if the basic assumption about shale oil being unprofitable below $ 100, or below $ 90 is untrue? What if US shale oil producers can cut costs, and manage to survive and stay profitable even with oil below $ 60 per barrel?

Well, then we have entered a different era. The post-OPEC oil era. It would be really ironic if it turns out that Saudi Arabia’s effort backfired. Indeed what if the American shale oil industry will win by  demonstrating that unconventional oil producers are in fact much stronger than anybody thought?

American ability to innovate

So, the real issue at stake here is American ingenuity and the ability of the US shale oil industry to cut costs and stay profitable, even when oil is below $ 60 per barrel. Is this possible?

Until yesterday everybody would have said “no”. My gut instinct is to say “yes”, it is possible. I am basing this optimism not on any insider knowledge of the new extracting technologies being rolled out, but on the industry track record so far.

It could not be done

Please do keep in mind that almost all energy experts have consistently underestimated the strength of the US “unconventional” oil sector. Until just a few years ago, the consensus was that shale oil would never be profitable. Too many technical hurdles that could be addressed only at a spectacularly high cost. Well, that was not true. Hydraulic fracturing (“fracking”) and horizontal drilling made shale oil extraction possible and profitable. In just a few years the US added almost 3 million barrels a day to its total production. Amazing.

Then it was said that, even if some shale oil could be extracted at a profit, (assuming oil at $ 100 per barrel), this “mini boom” would end soon, because there was not that much shale oil, while shale oil wells would yield very little compared to conventional oil deposits.  Well, that was also proven wrong. Plenty of shale oil.

Enormous pressure to innovate

That said, can more and quickly deployed technological innovation keep the American shale oil industry in business? The pressure is both huge and sudden. Obviously the precipitous decline of oil prices forced everybody to go back to the drawing boards.

Is it possible to invent something new that will allow major productivity gains while reducing drilling and extraction costs? Can the US shale oil industry prove to be far more resilient than the Saudis assumed?

I do not know for sure. But, as I said, we have been surprised before, many times. The US energy industry is clearly engaged in a historic technological race, and it just may win.

If America wins

So, here is the picture. Saudi Arabia is trying to kill US shale oil producers, because their unexpected success is threatening its market share. But if the Americans manage to survive by demonstrating that they can make money even when oil prices hit bottom, and stay there, then they will kill OPEC.

Saudi Arabia needs high oil revenue to pay for everything

Indeed, let’s keep in mind that while Saudi Arabia is a low-cost, high volume producer, the Kingdom needs an enormous oil revenue (based on selling oil at or above $ 90 per barrel) to finance almost everything. While Saudi Aramco will stay profitable with oil at $ 50 per barrel, the Government of Saudi Arabia will not be able to function they way it is used to with a drastically diminished oil revenue. Less oil revenue means fewer subsidies for the poor, fewer investments in public services and infrastructure. In case you wonder, beyond oil Saudi Arabia has no other revenue.

I am really looking forward to the day in which Saudi Arabia, Russia, Iran and Venezuela will be hit hard by falling oil revenue. There is plenty of “unconventional” oil not just in America but around the world.

American energy companies may be able to prove that it is possible to extract it and make a profit even when oil prices are 50% below their peak. In so doing they will break the price-fixing power of the OPEC cartel which was based on the assumption that there is only a limited oil supply, while just a few countries control a huge chunk of it.

 

 

 




NYT Report From Cuba Silent About Moribund Economy

WASHINGTON – In a longish report from Cuba, The New York Times tells us about various opinions expressed by different people on the island about the news of the new dialogue with the United States, with the possibility in the near future to re-establish diplomatic relations.

Cuba is a communist country

However, reading this article a not particularly well-informed reader would not get a few basic facts about Cuba. Number one, after 55 years Cuba is still a communist dictatorship that continues to outlaw free speech, while denying basic human rights. Number two, the Cuban economy, on account of 55 years of mismanagement by the dictatorship, is a basket case. But you get none of this from the NYT report.

Moribund economy

This is rather amazing. Cuba is a communist dinosaur. But the NYT does not seem to know this. During the Cold War the Castro brothers managed to preserve their absurd regime in part thanks to Soviet subsidies. With the Soviet Union gone, more recently Cuba got help from like-minded Venezuela in the form of below market price oil supplies. But this help does not make much of a difference. Indeed, several analysts describe Cuba’s economy as “moribund”, “frozen”, “stuck”, “hopeless”, and so on. But you get none of this from The New York Times.

Achievements?

On the contrary, the article points out a few significant social achievements of the regime: namely universal public education and health care for every Cuban. Now, one could wonder why such a super healthy and super educated population performs so poorly. But this issue is not explored.

The thrust of the article is about an old US-Cuba political feud that may be finally settled thanks to Obama’s more realistic approach.

We had no relations because of the communist dictatorship

And why is there such a dispute? Perhaps it has something to do with a communist dictatorship in Cuba that throws political opponents in jail, while it prevented economic growth by outlawing private enterprise?

In order to avoid any misunderstanding, I stated before and I repeat now that I am completely in favor of this new “Cuba policy” just  announced by President Obama. With the Soviet Union gone, Cuba is no longer a threat to America. The old “no relations with Cuba” approach makes no sense.

Still, as we enter this new phase inspired by pragmatism, let us not forget whom we are dealing with. Honest reporting that tells readers what kind of country Cuba is would be a good start.

 




Dragonfly, Symbol Of Courage

WASHINGTON – I recently saw a small exhibit of Japanese ancient military gear. There were swords with exquisite decorations and painted sheaths, elaborate uniforms, and various helmets. Among these, I saw one that had a beautiful, green dragonfly right in front. To me It looked strange, incongruous. An insect, a dragonfly, on military gear?

Symbol of military virtue

Yes, a dragonfly on a helmet. And the description attached explains the connection between the dragonfly and military virtue.

In Japan the dragonfly is a symbol of bravery. And here is the reason. The Japanese believed (mistakenly) that the dragonfly does not fly backward, but always advances, never retreating.

Therefore the dragonfly that never abandons its ground  was named kachimushi, “victory insect”, by the Sengoku era warriors, As a  symbol of courage, it was often placed on helmets and swords.

Intrepid dragonfly, always flying forward.