Click on the headline (link) for the full text.
Many more articles are available through the Energy Bulletin homepage
Innovating Our Way to Financial Crisis
Paul Krugman, New York Times
The financial crisis that began late last summer, then took a brief vacation in September and October, is back with a vengeance.
How bad is it? Well, I’ve never seen financial insiders this spooked – not even during the Asian crisis of 1997-98, when economic dominoes seemed to be falling all around the world.
This time, market players seem truly horrified – because they’ve suddenly realized that they don’t understand the complex financial system they created.
…How did things get so opaque? The answer is “financial innovation” – two words that should, from now on, strike fear into investors’ hearts.
O.K., to be fair, some kinds of financial innovation are good. I don’t want to go back to the days when checking accounts didn’t pay interest and you couldn’t withdraw cash on weekends.
But the innovations of recent years – the alphabet soup of C.D.O.’s and S.I.V.’s, R.M.B.S. and A.B.C.P. – were sold on false pretenses. They were promoted as ways to spread risk, making investment safer. What they did instead – aside from making their creators a lot of money, which they didn’t have to repay when it all went bust – was to spread confusion, luring investors into taking on more risk than they realized.
(3 December 2007)
Corn for Ethanol: An Inflation Crop (PDF)
Jeff Rubin and Benjamin Tal, CIBC World Markets (StrategEcon)
Boosted by legislated demand, heavy subsidies and tariffs, ethanol production will continue to rise strongly in the near term. Going yellow will make only a negligible contribution to both meeting US energy demand and reducing GHG emissions. But it will make a much larger contribution to inflation over the next several years.
…Add it all up and the net energy benefits begin to look pretty marginal relative to the huge subsides directed towards ethanol production. Most recent studies suggest that corn-based ethanol in the US provides only a 25% net energy benefit compared to the energy required in its production. By comparison, Brazilian ethanol, made from sugar cane, provides a 90% increase in energy (Chart 3, left).
…While corn-based ethanol will make a negligible contribution to meeting US energy demand, it will make a major contribution to US inflation over the next several years. Diverting an ever increasing share of the American corn crop from human consumption and livestock feed to energy production is putting unrelenting pressure on food inflation. And we are seeing that not only in the US, but around the world, given the key role the US plays in world corn markets. The ethanol bandwagon is contributing to the most significant bull market for grain prices in generations. Global grain supply, currently at only 53 days of consumption, has plunged to its lowest level in almost 50 years, as production cannot keep up with surging demand (Chart 5). Not surprisingly, grain prices have soared-up by a dazzling 70% in the past year alone (Chart 6).
…Corn prices have risen by 60% over the past two years, as ethanol production claims an ever increasing share of US corn production. But, the impact of ethanol on food prices is by no means restricted to corn. As ethanol pushes up the price of corn, farmers respond by switching crops. As more and more acres are connected to the production of corn, fewer acres are available for other crops that compete for the same land use. Hence the prices of those crops rise as well.
…The issues are by no means America’s alone. The production of ethanol from corn is crowding out other claims on corn production around the world, For example, tortilla prices shot up 30% recently in Mexico, forcing the government to come in with a price cap, as concerns have risen that corn imports form the US will fall short due to growing demand for ethanol in the US marketplace. Corn prices, of course, are transmitted through the food chain, given that 50% of all the corn grown in the US is used for animal feed. As corn prices soar, so does the price of cattle feed and ultimately the price of meat itself. Not surprisingly, food inflation is suddenly on the rise both globally and especially in the US, where the push for ethanol-based fuels is the greatest.
… Ethanol indeed has certain benefits, but only for those who grow corn and distill it into alcohol. The cost of this endeavor however, is enormous, and is rising with every gallon of ethanol produced. While the impact of rising grain prices on the half of the world population that is malnourished will probably not persuade Washington to rethink its pro-ethanol policy, surging food inflation at home will. Until then, however, the only thing Bush’s renewable energy policy will fuel is inflation.
(22 October 2007)
This report is on pages 4-7 of the newsletter. Page 1 features “Fueling Inflation” which predicts higher inflation, due in large part to higher prices for food and energy.
On a number of topics, Jeff Rubin seems to have a similar viewpoint to people in the peak oil blogosphere.
Recommended at the ODAC site.
-BA
Nate Hagens: global economy under stress (audio)
Jason Bradford, Global Public Media
Higher energy costs and a crisis of credit as a result of huge US debt levels will cause the US and global economies to contract in the near future. On this edition of the Reality Report, Nate Hagens of The Oil Drum discusses these stresses and possible implications for responses to peak oil.
Nate Hagens is a former Wall Street investments manager and has an MBA from University of Chicago. He is completing his doctoral studies at the University of Vermont’s Gund Institute for Ecological Economics. Nate is also a contributor for The Oil Drum, an online source for news, analysis and discussions about energy and our future.
Jason Bradford hosts The Reality Report, broadcast on KZYX&Z in Mendocino County, CA.
(3 December 2007)
