Monday, December 14, 2009

Throwing Good Oil After Bad Debts

Abu Dhabi decided to bail out Dubai (once again) by providing $10 billion in order to prevent a bond coming due today from defaulting. As the post's title says, that's precisely like throwing (more of) Abu Dhabi's perfectly good oil after Dubai's stinking bad debt. At today's prices, $10 billion is equivalent to nearly two months of Abu Dhabi's full-out oil production. And there's more bad debt where that came from, of course.

Ahhh, you will quickly say: it's only fiat money - book entries upon book entries. And Abu Dhabi still gets to physically keep its oil and can always hike the price it charges and get its money back from all the rest of us - including Dubai's lenders who are currently being bailed out (again).

Oh yeah? Not so fast..

In today's push-button interconnected global economy a bailed-out lender can immediately convert Abu Dhabi's pennies from heaven into a tangible commodity (say, crude oil), hire a VLCC and anchor the whole thing off the coast of Singapore. By bailing out Dubai and its lenders, Abu Dhabians are making a fool's bargain. They would have been much better off had they told everyone to take a hike, including those who kept building castles in the sand.

Ahhh, but what about the oil producers' ability to raise prices almost at will? Hah! And why do you think the US is sitting on Iraq, to mention just one geo-political petroleum pressure-point? Please note that Iraq has just announced plans to raise production to 12 mbpd in the future (it currently produces about 2.5 mbpd). If it succeeds (admittedly a huge if), it will surpass Russia and become the world's second largest producer of crude after Saudi Arabia. Kiss pricing power good-bye..


  1. Ah, but is all mankind a carbon copy of an.. ACCOUNTANT ?
    Taking any bets on the ability of Uncle Sam to mine and deliver all that crude in between terrorist attacks, civil war, and outdated infrastructure ?

  2. I wonder if if Abu Dhabi was slick enough to sell some CDS, possibly through a nominee, prior to announcing it would honor Nakheel's bond obligations.

    Pimco sure called it on the money again.

  3. Hel,
    This article suggests, as opposed to a certain blogger that I sometimes beg to differ with, that it was less a case of Gulf hubris and more a case of local gullibility. It seems the yokels were all under the sway of the usual International Development "Specialists".

    This article touches on the topic of Islamic finance. It is written somewhat sarcastically but it gives a broader answer than the one Hel gave you about the supply of gold being relatively fixed and the whole thing being just a sham facade. Specifically, it explains the requirement of risk sharing; in case you were still interested.

  4. Well, yoyo, the little transfuge who wrote your linked article is at home in neither world, and he is definitely not a reference towards understanding Islamic finance, even if he knows how to set down the "facts".
    The article is unbelievably biased. Unbelievably.
    Reading it reminds me how unreachable I find many of YOU on this blog on the subject of believing. (We will elide the object of belief, it is not really essential.)
    There is a world of difference between believers and unbelievers. A world.

  5. Debra writes:

    "There is a world of difference between believers and unbelievers. A world."

    That is exactly what I meant when I recently said here there is an unbridgable gap between the bound and unbound thinker.

    Carl Jung had it that only 3% of the population really gets it.

    Joe M.

  6. I did warn you that it was sarcastic in tone but it was accurate as far as risk sharing is concerned which, as I understand it, is the corner stone of legitimate Islamic finance.

    If you think it through, bubbles can't form under a system of genuine Islamic finance because their is only one class of investors who all share equally in loss risk and only sound, conservative projects are financed as the "smart money" early investors don't get paid off until the project turns a profit; no opportunity to cash out early and lure in suckers to take the fall.

  7. Well, yoyo, before we lifted the lid on Pandora's box way back there, OUR finance could have been/was ? in the same position.
    And lifting the lid REALLY doesn't necessarily have to do with belief systems. Not necessarily.
    The problem as I see it with Islamic finance in Carlos' article is the clubbing way.
    Like... the infidels' investments don't get respected the same way as the believers' do.
    That is a problem...
    But globalization definitely has its drawbacks.

  8. Oh Thai,

    As long as we're on the subject of the ME (and I wouldn't want you to feel neglected), I thought this nugget on the favored few might catch your fancy (or at least your eye):

    **An influential West Bank rabbi, Yitzhak Shapira, published a book that Israeli daily Ma’ariv described as “the complete guide to killing non-Jews.” Drawing on the Bible and religious law, the 230 page King’s Torah “opens,” according to journalist Roi Sharon, “with a prohibition against killing non-Jews” but “very quickly” moves “to [granting] permission” for their murder, under certain conditions. Among the gentiles one is permitted to kill, according to the rabbi, are adult civilians and children. Shapira writes: “One must consider killing even babies … because of the future danger that will be caused if they are allowed to grow up to be as wicked as their parents.”

    In late November, Ha’aretz followed up on Yitzhak Shapira. Funding for the “Baby Killing Rabbi” had come straight – to the tune of $305,000 since 2006 – from the Israeli government till.**

    I know, I know, it's so inconsiderate (to say nothing of anti-semitic) of me to notice these things; a vastly worse transgression than that committed by the select semites who actually say and do these things. I guess I'll just have to beg your forgiveness.

  9. Debra,
    I didn't find anything in the article that suggested that the "infidel's" investment got clubbed any differently than a Dubai native's investment. It's just that the foreigners didn't understand the nature of the loss sharing provisions in the Sukkuk and so were blindsided by them.

    I think you might be conflating the Dubai case with a case involving two Saudi investment firms that has been somewhat sloppily reported by the western press.

  10. Interesting dynamic developing here.

    I have no idea what my local electricity rates are but according to this, they are approximately $0.08 per Kilowatt-hour (kWh).

    My back of the envelope calculation means these will pay for themselves in about 11 years which is 6.5% rate of return not including deprecation/labor and the risk of dropping oil prices.

    I guess this is a reasonable rate of return in a deflationary world.

    Thought I might add that putting even 10 of these things on your roof (seems unlikely) and getting 12 hours of continuous sunlight every day of the year would only get you 21kWh of power a day.

    Since the website says the average home uses 30.2kWh/day, this would be only 2/3 daily needs assuming no other efficiency measures.

    ... Still it is a start. Further, it is a 6.5% rate of return which is pretty decent.

    Anyone know what the % annual drop on the price of these things is?

    If they are dropping by even 6%, they may be reasonably cost effective to the average person in another 5+ years.

    And if you own a car like the Volt, which this blogger says uses .25kWh per mile, you would therefore consume an additional 8.2kWh/day assuming an average drive of 33 miles/day.

    So using wildly optimistic assumptions, one could see these things generating 50+% of tomorrow's household/transportation power needs in the future.

    Probably a lot cheaper than sending carrier battle groups abroad. ;-)

  11. Thai...

    energy conservation has a better return on investment than energy creation.

    I think it would be beneficial for everyone stop looking for fancy gadgets to solve their problems and go back to "basics", ie-- PASSIVE solar heating, better (airtight) insulation, and living in MUCH smaller homes.

    Passive houses are airtight buildings that use heat from appliances and even the occupants' bodies for warmth

    personally, i would nix the traditional stick framing in the graphic and go for a 2x6 equivalent SIPS panel with a urethane core.

    Passiv haus' (and conservation in generalu) aren't nearly as glamorous as Photovoltaics, but they make much more sense, assuming you're the type to be swayed by rational arguments.

    (and I know you are!)

  12. "Probably a lot cheaper than sending carrier battle groups abroad. ;-)"

    Everybody knows that cost (in other people's blood and treasure) is no obstacle when it comes to Securing the Realm but in the termination department, it's good to see a little equal opportunity being extended to participants on both sides of the fence:

    **Further revelations about the procedure emerged last January, during Operation Cast Lead, when the Israeli media reported that Israeli soldiers being sent into Gaza had been told to avoid capture at all costs.

    Channel 10, a television station, quoted an officer from Battalion 501 of the Golani Brigade saying: “No troop member from the 501 battalion is to be kidnapped at any cost, nor in any situation, even if this means blowing up a grenade in his possession, killing himself and those trying to kidnap him.”

    An officer from the Givati Brigades was also quoted, citing the Hannibal procedure, adding: “We will not have two Gilad Shalits at any price.”

    During Operation Cast Lead, Hamas claimed that it had captured soldiers on two occasions but that the Israeli army had killed the Hamas fighters and soldiers in aerial attacks. Three Israeli soldiers were reported to have died in friendly-fire incidents.**

    It seems the high command was not content to rely on the individual initiative of the captured soldiers concerned.

    On a lighter note, anyone been following the exploits of Sarah Obama's Excellent Adventure? It seems to have gathered a large following on the right-wing blogosphere.

  13. Cotton, long time no blog with, what's up?

    I WAY totally agree with you.

    ... Except of course when it comes to conserving on blog comments. ;-)

    But I will say this, I have noticed this teeny tiny tendency towards asking the other guy conserve so that we personally get to still use the difference. ;-)

    Indeed it would appear that diet pills are way more popular (at least here in America) than actually dieting.

    Tragedy of the commons on (fractal?) scale.

  14. Also I do know there are some medical concerns with these hermetically sealed homes- though I am not up on the details. As but one example, I do know we started seeing major increases in asthma, etc... in South African Townships when people became more affluent and moved from rickety shcacks to cinder block homes that were much better sealed.

    I am not saying the issue is zero sum and therefore not worth is so that I can justify keeping my bedroom window open in the middle of winter (which I don't), but there would likely be unforeseen costs in doing this.

  15. Read the article Thai, these homes come with heat-exchange ventilation systems.

  16. I did miss that but my point stands. I seriously doubt that is much ventilation.

    Cinder block homes in South African townships are not sealed nearly so well.

    And Cotton, I came across this.

    It seems dieting remains unpopular and that denial-blame remain (as ever) powerful emotions.

  17. On the contrary, a properly designed ventilation system directs fresh air to every room in the house.

  18. Well, by the analysis of one commentator who was responding to a recent post on an obscure, but very good blog named Volatility, the PTB want-as per the work of Thorstein Veblen-high oil prices, and will start wars just to maintain them.

    I found the assertion of the necessity/desirability by bankerdom, in particular, to maintain high oil prices, problematic, but if one hews to that line, it would argue that very low oil prices for any appreciable period are not in the cards. This, of course, is a scenario that operates in the absence of Peak Oil.

    Of course, running contrary to the aforesaid scenario, is the fact that oil prices were very low for a decade leading up to the first Gulf War. And equally, working in favor of the "Veblen" paradigm, it the a fact that immediately before the Gulf War, the price of oil plunged to eight bucks a barrel.

    The crisis in Iraq, was, in the end, nothing by a crisis of too low oil prices.

  19. ....nothing but a crisis of too low oil prices.

  20. I read something along those lines that the govt needs a high FOREX deficit to finance its sale of Treasury debt as Americans were no longer buying sufficient quantities at the low rates the govt wanted to pay.

    Obviously such an arrangement can have only a limited shelf life before a country goes broke or is forced to sell off all its assets to the holders of those Eurodollars.

    Perhaps Marcus is correct about govt plans to resort to nukes to welsh on its debts or maybe this is a long range plan to forcibly impose privatisation on the US economy by TPTB.

  21. The problem with a big FOREX deficit is that now foreigners are shunning U.S. sovereign debt except at the shorter end of the curve. In time, there will be no part of the curve they will be interested in.

    Which leads me to the subject of hyper-inflation which is nothing less than the effects of a currency debacle.

    The two best arguments against hyper-inflation have been and are:

    1.) You can't have a run on a reserve currency.

    This has not, indeed, ever occurred to my knowledge. However, The Dollar as a reserve currency is presently in the process of being replaced.

    2.) MAD, this doctrine, at least as it pertains to finances and money, was coined by, I believe, Eric Janzsen, and states that the two principal actors inextricably bound up in mutual assured destruction are The U.S. and China. It further posits that, AT THIS TIME, China can not afford to see a Weimar outcome in the dollar and therefore one will not be allowed.

    This notion has merit, but clearly China is already taking out insurance, as are other nations, against just this outcome.

  22. Edwardo, wouldn't the boundary condition for this be when the US saw its trade deficit revert to a surplus?

    When we have no trade deficit, then quantitative easing seems far easier as Americans simply default on themselves- e.g. zero-sum.

    I have a hard time seeing it happening till them.

    What is the trade deficit saying right now?

    It is down but not zero and I think it is widening again.

  23. Thai...

    sorry for the late reply, and skimping on comments in general as of late. Regardless, Yoyomo seems to have answered for me--so thank you.

    But, you are correct. Houses need to be ventilated or respiratory issues will develop. But does it make sense to construct drafty houses (throwing good oil after bad practices)? Or to engineer a properly sized HVAC system to bring fresh air into a well sealed, energy efficient home instead??

  24. Cotton, since you have been gone a while...

    Dink gave me this and I thought I would share as I wish I had written it myself.

    enjoy and be well ;-)

  25. I saw a Nature program on PBS about the natives using the Jaglavak ants to rid their huts of termites that infest the roof beams as termites are the natural prey of the Jaglavak. They go out and dig up a big jugful of an ant nest and sprinkle it on the termite tunnels but the program never made clear how they get rid of the vicious stinging ants once they dispatch the termites.

  26. Really Thai,
    You shouldn't give me such juicy lead ins, just think for a minute what I could do with that line and comment on who's asking/forcing who to leave.

  27. Edwardo, wouldn't the boundary condition for this be when the US saw its trade deficit revert to a surplus?

    -And a trade surplus will not happen except in circumstances that exist at the boundary of my imagination.

    When we have no trade deficit, then quantitative easing seems far easier as Americans simply default on themselves- e.g. zero-sum.

    I have a hard time seeing it happening till them.

    What is the trade deficit saying right now?

    It is down but not zero and I think it is widening again.

    -Yes, it's widening.

  28. But wouldn't this be an indication that foreign investors, looking at all their options from their viewpoint, are saying that as bad as the investment outlook for America is, it is never the less worse everywhere else?

    If we are the least bad of a myriad of bad choices, we still win...

    I do not know what all the investment options looks like to someone in every other place in the world but for all I know, it might look pretty bad for them as well.

    Isn't the trade deficit a surrogate marker for this?

    Am I getting this wrong?

    Hell, do you know?

  29. But wouldn't this be an indication that foreign investors, looking at all their options from their viewpoint, are saying that as bad as the investment outlook for America is, it is never the less worse everywhere else?

    -I don't think so, because, if nothing else, save for a few other western nations, the U.S. Government has enormous, ship of state sinking, fiscal obligations going forward. I hasten to add that no one needs to invest in any nation's scrip- investing being broadly defined-and increasingly they won't.

    If we are the least bad of a myriad of bad choices, we still win...

    We aren't, and we won't.

    I do not know what all the investment options looks like to someone in every other place in the world but for all I know, it might look pretty bad for them as well.

    -It doesn't look great at the moment because we-the planet- are still on the deflationary depression versus crack up boom teeter totter.

    Thai, let me cut to the chase. Here's the problem with Mr. Griswold's thesis as I see it.


    When Americans buy imports, foreigners must do something with the dollars they earn. They can either use the dollars to buy American exports or to invest in American assets, such as Treasury bills, stocks, real estate and factories.

    -He assumes that the dollars must go into the purchase of U.S. instruments, but that isn't so.
    The Chinese, for example, can, and are, using their surplus as collateral to buy up all sorts of stuff that is not in the U.S.

    One of their groovy plans is to turn some large portion of sub-Saharan Africa-imagine a territory the size of, oh, say, New England- into a de-facto Chinese Colony. Towards that end they already bought up Connecticut. I hear the acquisition of Rhode Island is almost complete.

  30. How do they get the money out of the US without effecting the trade deficit?

    If the Chinese took the money they earned in America out of America, Americans would not have that money to purchase things including imports and therefore our trade deficit would actually fall.

    Instead it is going in the other direction. It would appear the Chinese are putting even more money into America.

    Is this wrong?

  31. Show me the evidence that "the Chinese are putting even more money into America."

  32. The evidence is in this conversation: the trade deficit is widening

  33. Hell, would you please help us out?

  34. I am loathe to Heritage Foundation data, and to add insult to injury it shows that the U.S. is second only to Australia for Chinese investment.

  35. I guess when I say "China" I mean any foreigner and use them as a surrogate as they seem to save and invest.

    The real issue is whether foreign investment in the US is increasing as a % of world foreign investment, shrinking or staying the same.

    If it is staying the same or growing, then that would suggest the dollar is not going anywhere relative to other currencies.

    Whether ALL currencies are falling relative to gold, etc... is another matter.

    I thought the trade deficit was simply a marker for foreign investment in America and is actually a good thing.

    It is when it drop s that we are in trouble.

    But I admit I could have this wrong.

  36. I think you, and others, may find the piece at the link of interest.

  37. Abu Dhabi in essence traded some worthless TBills for some worth less buildings. Say, a fifty percent haircut for real assets?

  38. Edwardo:

    That Daily Crux site is basically a bunch of Libertarian tripe. Not really anything of interest once you get into it.

    We're not bankrupt -- yet. If we had not cut taxes (in a fit of madness) we would not have the problems we have now. Hubris brought us to this point.

    Here are some words Libertarians do not understand as a general principle:

    - Loss mitigation
    - Negative externalities
    - Permissive waste
    - Fraud (by business interests) in the inducement

  39. "If we had not cut taxes"


    But the corollary, "if we had cut spending" is also just as true.

    And some people didn't want to do that either.

    I think it completely dishonest to take a "their side was as fault" approach.

    Call a spade a spade my friend

  40. @Thai:

    I see you failed to see my point.

    Did you read my links? All of these must be alleviated by some government function (or business bureaucracy).

  41. Okie, one thing I have learned about conflict between my kids is that it rarely does any good to get involved in anything but the most serious of disputes.

    In my opinion, "If you build it, they will come.

    I might suggest that the very act of allowing everyone to drag you and me into their "disputes" is doing nothing but increasing the amount you and I need to pay for disputes in the first place.

    I think we just look at life differently. I am a physician who does not see the goal of life as supporting the medical industry. Similarly, I do not see the goal of life as similarly a means to support the legal system.

    If others want to lie/cheat/steal/harm- throw them out of the collective.

    If you want to support them doing this, then by all means do so but with your own money.

    We cannot spend our money on everything and I do not always think spending it on laws/lawyers/courts/jails/prisons/etc... is always the best use of our money.

    Externalties exist simply by the fact that we breath so this is not saying anything special.

  42. I health care and education are a bubble, so too is the legal system

  43. Okie, libertarian tripe or not- I really don't care as I'm not a Libertarian- the U.S. is bankrupt. But you may, as some U.S. accountants do, add the numbers up in interesting ways. Arguing that if if we had not cut taxes is by the by, but, since we are on the question of taxes, the U.S. government will try to raise taxes in the aggregate and make matters worse.

  44. One of the problems is in, NOT THE ACT of raising or lowering taxes, but.. the meaning of that act as it refers to the collectivity.
    Taxes have meaning.
    Lowering them said a lot.
    Now, trying to undo what lowering them said, that is going to be a major problem...
    The world of meaning is not "regulated" by - and + signs.
    As I say here from time to time, what is going to really get things moving (for the collectivity) is shared hardship.