Category: Blog

100 years of Middle Eastern oil

August 18, 2008 17 Comments

I awoke this morning to be reminded by the Today programme that 100 years ago a British explorer first struck oil in Iran, and began the dash to the Gulf to set up an oil industry.

My sources tell me that the first oil was found at Masjid-i-Suleiman on May 26th 1908 by George Reynolds, working under William Darcy’s licence. This discovery led to the formation of the Anglo Persian Oil company, which proved a very popular investment in 1909, subsequently to become BP.

In an era when it is fashionable to decry oil for its environmental impact as well as for its impact on the politics of the Middle East and the great powers, it is perhaps timely to remember the huge leap forward in our living standards which a hundred years of relatively cheap oil has brought us.

Oil as a fuel has kept us warm and powered our transport. As a chemical feedstock it has enabled scientists and chemical companies to develop flexible plastics, bitumens and other crucial products that play such a role in modern lifestyles.

Doubtless if mankind had not had oil to go to war about the bellicose would have found other pretexts and causes of dispute.

Our Olympians ignite enthusiasm for the Games

August 18, 2008 5 Comments

This week-end was the week-end of transformation in the UK’s feelings about the Olympics. Scepticism bred of Chinese politics and spin, of government targets and the government elite piling out to Bejing at our expense has been banished by the sheer guts, determination, skill and talent of Uk competitors. Many of them have decided to live their dream. Many of them have made their dreams come true. It is wonderful to read of their exploits. Congratulations to them all. Best wishes to all those still to compete. They are a reminder to everyone that if you really really want something, you might be able to obtain it – after you have put in hours, days, years of effort and concentration.

See clearly – do not dismember your kingdom

August 17, 2008 16 Comments

I have enjoyed the season at the Globe this year. Their Merry Wives has received much deserved praise for its light hearted romp through the lives and loves of Windsor housewives, and their Midsummer Night’s Dream stresses the comic, with well played scenes from Bottom and the mechanics. The production which has made the biggest impression on me was the depth and tragedy of King Lear.

The tragedy seems so topical because it is on one level about a King who gives away his kingdom to the wrong people, splitting it physically to do so and causing civil discord through the gross lack of judgement. It has been a bad few years watching our present government giving away our powers of self government with a similar lack of judgement, stirring up disagreements where there need have been none, and splitting the country into European style regions. Gloucester also makes a rank misjudgement by choosing the advice and word of his illegitimate son over his legitimate son, setting himself up for loss of title, and loss of his eyes.

Both Lear and the Duke of Gloucester bring their misfortunes on themselves by making gross misjudgements about their children. Lear refuses his sweetest daughter a third of his kingdom when he dismembers it for his three daughters before his own death, because she does not express her love as flatterers do. Gloucester, who wishes to keep his inheritance whole and is not in the business of giving it away before his death, rashly decides to disinherit his heir, giving the promise of it to his bastard son who is falsely undermining his brother and then his own father. Neither old man can see clearly. Lear goes mad. Gloucester, in one of the most shocking scenes in theatre, has his eyes put out, to make the point that he has not been using them well. He is stripped of his title and powers thanks to the duplicity of his illegitimate son. Had Lear not made the error over Cordelia and given her her just third there would still have been trouble in the kingdom, for the whole idea of splitting it with daughters like Goneril and Regan was fundamentally ill conceived. Both old men lose their revenues and their authority through their stupidity.

Shakespeare is not suggesting there are easy answers to the war between the generations.His play reminds us how fragile a thing peace and good government is. A single rash misjudgement on the scale of Lear’s or Gloucester’s can set in train a series of events that leads to the destruction of a person’s health, wealth and status. There are always people in the world of politics – or most other worlds – who will lie and cheat to gain office. Once in office they will abuse or even destroy it. Others will have to obey them for they have “authority”, and some will willingly obey them because they have patronage.

Like Lear, this government’s tragedy is they cannot see clearly. They are unwilling to admit the magnitude of the economic errors they have made. They refuse to accept that their mismanagement of the public sector is a big part of the problem the UK now faces in adjusting to the credit crunch. Indeed they wish to make it worse by their extreme policies of public spending and borrowing. They too have set in train a series of tragic events that will do harm to the United Kingdom. Just as Lear’s splitting of the country caused grief, so Labour’s lop sided devolution is now destroying them through the pressure of the SNP and the strength of English resentment at its unfairness.

Shakespeare’s masterly use of the theatrical – Lear’s madness in the storm and Gloucester’s pathetic attempts to kill himself – are extreme to illustrate wider truths about the human condition. Seeing Lear again in such a good production was a poignant experience. Our country is beign dismembered by politicians who cannot see clearly. Once again powers to govern ourselves are being given away. Once again those in power are making rash judgements, and cannot distinguish good advice from false.

No wonder this too is a time of troubles. Bad economic misjudgement and a bungled constitutional settlement with Brussels and the regions will bring the government down eventually . The tragedy is we are still so far away from a possible change of government, and this government is so far away from understanding what is wrong, let alone wanting to do anything to put it right.

Devaluation – not such an easy option for most of us.

August 16, 2008 17 Comments

Readers of this site will know that I expect the squeeze on people’s incomes to intensify this autumn and winter. The government has decided that it is not going to make any of the adjustment in the public sector by reducing its spending – on the contrary it is boosting it in the most irresponsible way, to pay for its state pensioners like Northern Rock. As the country has borrowed too much on a grand scale that means individuals and families have to tighten their belts even more.

We all know that part of the belt tightening is forced on us by higher Council taxes, higher tax from petrol and diesel, threatened higher Vehicle Excise Duty and the abolition of the 10p band. We all know another part of it comes from rip off government, with endless increases in fees and charges for government “services”.

This week we are witnessing a third part of the squeeze – devaluation of our currency. In recent months we have got used to devaluation against the Euro. We have had a 10% devaluation compared with its starting rate, meaning that if anyone does want to buy a German car or a bottle of French wine it costs 10% more. Now we are having to get used to devaluation against the dollar. The government has presided over a 7% devaluation in just the last couple of weeks.

Labour governments have a habit of devaluing. In the days of fixed exchange rates there was drama, with a government trying to “save” the pound, only to give in in the end. Labour took us down from the $4.03 rate to $2.80 on 14th September 1949, and devalued again on 18th November 1967 from $2.80 to $2.40. Now they are in the process of taking the pound down from over $2 where it had reached in the early 1990s and again last year, under a regime of floating rates. There will be less drama, but the effects on our living standards will be the same.

I prefer floating rates to fixed rates, and recognise just how much damage was done to the UK economy in the past by trying to defend silly rates. The devaluation we have had recently against the Euro will help our exporters. However, if a government uses floating rates to remove discipline over its own budgets and finances, it will end in tears. If a government spends, borrows and inflates the public sector too much the currency will give too much, helping fuel the inflation. This government had better be more careful, now it is embarked on this slippery path. Currency falls can run further than the authorities might like if they remain careless about them and their causes.

What we can be sure about is that people are getting poorer because the government is determined to stay richer. The devaluation of recent days against the dollar, and the devaluation of recent months against the Euro has cut the value of the “pound in your pocket”. Many commodities and products are priced in dollars on world markets. They are suddenly dearer thanks to the fall in the pound. That means we can buy less of them.

So pull in that belt a bit more. Living standards are falling and have further to fall. An overborrowed government has no intention of tightening its belt, so that means the rest of us have to do so even more.

If it’s change in US policy you want, Bush is your man.

August 15, 2008 4 Comments

If you want to know what the new President of the USA is going to do (whichever one wins), just look around you. Under the pressure of low opinion poll ratings, the logic of events and change of mood generated by Democrat successes in elections, the Bush Presidency has changed substantially.

Bush, you may member, came in like a lamb. This was a new Republican, a caring Republican, who could reach out to some Democrats. 9/11 changed all that. The Pentagon moved into a position of great influence over the Administration, which decided it had to pursue wars in countries associated with the terrorists. We moved from lamb to warrior. This year we see the US government shifting back to the arts of diplomacy. Just as Obama says he wants, the US is talking to its allies and working with them. The US is working through the French President over the vexed issue of Georgia, and stresses in every move and statement the need to work together with the Europeans. Just as Obama wants, the US is talking tough but not threatening military intervention. It has not ordered the carrier and surface fleet to concentrate near the Russian coast. The State department seems to be in charge and the Pentagon is taking a back seat. Similarly in the Middle East the talk is all of transferring power to locals in Iraq and Afghanistan, whilst warlike threats to Iran have been played down. The new mood is collaboration and diplomacy rather than leadership and military activity.

In other spheres too the Administration has moved in the direction of its critics. The President now says he thinks climate change is serious and needs multilateral action to tackle it. Maybe a new President would go further unilaterally than Bush will ever do, but if he tries to he will discover the adverse impact it will have on domestic politics. Americans like people the world over will resent having to pay higher taxes or follow more stringent regulations than their friends and competitors overseas, making it improbable a canny politician like Obama or Mc Cain will do much more than continue the shift in rhetoric that Bush has begun on this topic.

It is rare for a new government or even President to make a decisive shift which the wider governing establishment is not already making. I suspect that both Mc Cain and Obama, campaigning on change, will represent little shift from Bush Mark 3 in either foreign affairs or in domestic. Obama might be a higher tax and even higher spending President, though Bush the big spender will take some beating in that department. Mc Cain represents continuity in Iraq and Afghanistan, but in the end both Obama and Mc Cain would cut their commitments there, Obama more slowly than he says he would like and Mc Cain more quickly than he currently says is necessary.

Meanwhile, neither candidate has anything original or important to say on handling the Credit Crunch and the state of the world economy. The Fed will do what is has to do, with little change to current policy whoever becomes Treasury Secretary.

The more US politicians talk about change, the more you should expect continuity. The shift in policy has occurred already. Bush is now a multilateralist believing in diplomacy, after the difficulties he placed himself in through his two big Middle Eastern wars. We will now discover that diplomacy does not work well either, as the Russians continue their military presence in Georgia, destroying the Georgian military’s hardware whilst the West watches and condemns from a safe distance.

A sensible President would immediately set about remedying one great source of US weakness – its dependence on foreign oil.

The lies about the EU economy and the Credit Crunch

August 14, 2008 22 Comments

Today we will learn whether the Euroland economy is already in decline, or whether its growth has merely slowed to a standstill. The briefing in advance of the figures implies we are being readied for bad news.

Over the last year we have heard a great deal from the Uk government and from the supine parts of the media about a US recession, and how the world problems emanate from across the Atlantic. We often have to hear lectures about the importance of the EU to our economy, and even about the superiority of the EU model. If any of this were true we should by now be saying “Thank heavens we are so dependent on the EU and not on the US, for we can ignore recessionary winds from across the Atlantic”. Instead the Bank of England Governor had to warn yesterday that the UK authorities have been misleading us for some time about the likely growth rate in the UK this year and next. He himself did not even rule out a recession here in the UK. Today we will learn that the motor some want us to hitch to more completely, the Euroland economy, is once again performing less well than the US.

The truth about our economic relationships with the US and the EU is more complex than the idiot soundbite that we depend for 3 million jobs on the EU owing to more than half our trade being with the EU. It always left open the question of what about the 90% of our jobs that on their own admission do not rely on the EU, wrongly implied jobs in exports to the EU would not exist if more people had voted No in 1975, and ignored the trade in services and flows of investment and interest where the EU proportion is much lower than the 50% ish share they have of our trade in physical goods. The relationships you need to trade in services are often deeper and longer term than the relationship to buy manufactures, and tend to be with fellow English speaking countries with common law systems for obvious reasons. A British legal or accountancy firm is more likely to do work in the US or Australia than in Austria or Germany.

The current situation also shows how wrong the spin has been about the sources of our present discontent. The so called US made Credit Crunch is a credit crunch in many parts of the world where Central Banks and Regulators have made similar mistakes to the US, but where they made their own. Northern Rock did not go down because it had US sub prime mortgages, or because the US banking regulators fell down on the job. It went down with North eastern UK mortgages, under the supervision of the UK authorities. Similarly, the Euroland economy is slowing owing to stupid policies of high tax, high spend, high regulation and poor Central banking in Europe, not because of the mistakes made by the Fed.

So today we will learn if the spin is right that whilst the US economy continues to grow despite the endless declarations of a US recession by all those US haters out there, Euroland either is now going backwards or is on the edge of declines in output. In which case the UK strategy under this government of hitching us more firmly to the EU governmental bandwagon is doubly foolish, being bad economics as well as bad politics.

Not that this gap in performance between the US and EU economies is anything new or a surprise. The EU is a consistent underperformer. As far as I am concerned – and as far as many Labour MPs claim – the prime aim of our economic policies in the UK should be to give as many people as possible an opportunity to earn and enjoy more income. In the decade 1987 to 1996 the US economy grew by 32.9%, compared with the EU economies growing 11%. In the 20 years to 2006 the US grew by an impressive 82.5%, despite being richer than the EU to start with, whilst the EU limped to just 41.6% growth.

Over the long term, as well as over the short term, the US economy has outperformed the EU one by a wide margin, growing twice as quickly for 20 years! Looking at individual years the US outperformed in 16 of the last 20, and even in the two years of the hi tec collapse which pro Europeans enjoyed as an opportunity to condemn the US model, the US economy still did not have a down year.

The government needs to amend its rhetoric. This is not a downturn made in the USA or a Credit Crunch unique to Wall Street. A series of problems have emerged in the way central Banks, governments and banking regulators have done their job in most major markets. The UK has a bad version of the problem, with its own mistakes at home adding to the gloom. The Governor yesterday was right to warn the government not to relax its controls over public borrowing, but he will not be heeded. The UK government is determined to make it worse by borrowing even more. Meanwhile, the cavalry that are meant to arrive from the EU to help us in time of need have lost their horses and will not be riding to our aid. Their economies are already deeper in the mire than the American.

The Bank begins to get its forecasts right – how about some action?

August 13, 2008 8 Comments

The Bank’s dose of realism today implies the authorities have at last got to where many of us have been for months. At last they admit that there will be very slow growth, no growth or even a recession over the next four quarters, and at last they recognise that inflation will soon peak.They acknowledge that the Credit Crunch remains a big problem. Why then do they take no action on interest rates or Money market liquidity to sort it out?

Oil wars and the way to respond to Russia

August 13, 2008 13 Comments

When the history of the last few years comes to be written it will be likely that historians see the last decade as a decade of wars about oil. The US and UK interventions in Iraq and Afghanistan were not just a response to terrorism. They were also about creating democratic regimes governing or close to the oil fields that would be sympathetic to western needs. The West has been less keen to undertake military adventures for regime change in tyrannies without proximity to oil. The US sees the Middle East as a crucial area to influence because it is now a heavy importer of energy.

Putin’s latest assertions of Russian power has only been possible thanks to oil and gas. The giddy rises in the oil price in recent years has filled the Russian coffers and helped pay for the renewed military machine he used in Georgia. His whole political strategy geared to increasing Russian influence and exerting control over territories of the former Soviet Union clustered around Russia is based on the control and exploitation of oil and gas reserves. One of Georgia’s offences is the pipeline that runs across its soil which Russia does not directly control.

The Western response to Putin’s rise has been slow and contradictory. On the one hand the West has decided to continue to treat Russia as a normal democratic state, trying to keep it in the framework of diplomacy through the UN, the G8 and other international fora. On the other hand the West understandably excludes it from NATO, occasionally uses tougher language to condemn Russian actions and speeches, and offers friendship and military support to several of the countries Russia would like within its sphere of influence.

This ambiguity is all too clear once faced with the challenge of the Russian military action within the independent state of Georgia. Russia used the argument familiar to students of 1930s Germany that it needed to intervene to assist the Russian minority within another state. The West rejects this argument on the grounds that one state should not violate the territory and kill the citizens of another state. This case would be stronger if the West had not invaded Iraq and used as one of its arguments to need to help the oppressed minorities under Sadam’s regime. This is not an issue which is going to be resolved by the current welcome truce, nor by further debate about the rights of minorities within states and the basis on which international forces can intervene if ever. This is about the raw balance of power between Russia and the West.

The West needs to play this long as Russia is playing it long. The adventure in Georgia was just to test how far the strengthened Russia can now go. It is not the end of the process of Russia building her strength and expanding her influence and territory. The West needs to take much more action to tackle the cause of its own weakness, its dependence on oil and gas imported from volatile parts of the world or from Russia herself.

The US. the UK and the other major European states need to be more energetic in encouraging the exploitation of more gas, oil and coal from within their own boundaries. They need to be install more hydro power, sensible renewables, nuclear – whatever it takes – to cut dependence on imported oil and gas. World markets may give us a breathing space from ever upwardsprpice movements, and may dent Russian revenues for a bit, but price rises can and will resume after the slowdown unless the West does something much more positive to cut its needs for imports. I have set out before what the UK government could do – why the delay, when Georgia has made the point again that there is a strategic need to do this as well as an economic one.

The Bank has lost the last battle – it needs to concentrate on the next one

August 13, 2008 5 Comments

Yesterday’s inflation figures make grim reading – even grimmer than many forecasters were expecting. We may have a few months more of dreadful inflation figures.

Readers of this blog will not be surprised. They will also know that I want the Bank and the government to start tackling slowdown and property crash, recognising that next year inflation will tumble anyway. They need to accept that they lost the battle against inflation for this year during the heayd days of their mistakes in 2005-6, apologise and try and get the next move right.

Fortunately, as predicted, commodity prices and energy prices have started to fall. We are already seeing sharp declines from the unacceptably high peaks on the forecourts for petrol and diesel. Price competition is intense, as supermarkets and large petrol retailers compete for the diminishing spending power of the customers. There could be further declines as the world economy slows and weakens under the impact of the Credit Crunch.

The masochists at the Bank of England want to make the crash worse by keeping rates high and even threatening higher rates. The government is making the crunch worse by its own profilgacy, pre-empting cash needed elsewhere and spending some of it on propping up a nationalised mortgage bank that is then not allowed to make new advances! Maybe the Bank does need to threaten higher interest artes to try to discipline the government. After all, the government has powered some of the borrowing excess with its off balance sheet adventures, its PFIs, PPPs and nationalised companies.

The dollar is now strengthening as the US current account improves and as US companies become more competitive. The European Central Bank will continue to keep rates too high for too long because it also made inflation mistakes in the miiddle of this decade and is sore about the current consequences.At some point they will have to cut rates to ease the pressures, and the Euro will cease to be so strong.

Governments and Central Banks have made a right mess of the last few years. They were too relaxed in the good times, misunderstanding just how much credit they had released and how long it took for that to cause inflaiton. Now they are too relaxed abnout the bad times, and seem unable to understand how deflationary the Credit Crunch will prove to be.

An inflammatory letter reissued from June

August 13, 2008 1 Comment

In June I wrote about inflation. Today the same is true, but we now know that commodity prices are falling as suggested in the draft letter below:

“The Governor may soon have to write a letter to the Chancellor apologising for the high rate of inflation and saying what if anything he needs to do about it. In a way it should be the Chancellor writing to the Governor, as the Treasury has been at the bottom of the economic mistakes that have led us to higher inflation, and the Treasury has had more power than the Bank in many of the important matters which guide our economy.

The Governor, in an honest letter, would say:

“Dear Chancellor,

I am writing to report that inflation is now above 3%. This has come about because we held interest rates too low in the period 2004-6, allowing a credit bubble to emerge. The government’s decision to switch target from RPI to CPI made our task more difficult, as the CPI at the time was lower than the RPI, and has since proved to be a very poor indicator of the overall inflation people are experiencing in their daily budgets. Indeed the gap between RPI and CPI has got larger, meaning our failure on inflation as measured by the old target is worse. We felt we had to respond to a lower, easier target once set.

The government’s love of PFI/PPP off balance sheet liabilities and its rapid expansion of public spending and borrowing made conditions far looser in credit markets than was desirable, but we did not feel we could take full action to offset the government’s own wish to expand borrowing so rapidly. We felt the Treasury clearly had good policy reasons for wanting to increase public sector costs and the size of the public sector as much as it did. It was not for us to try to throttle the economy with very high interest rates to offset this huge public sector expansion. I accept that this was wrong in retrospect.

We were also wrong to keep the markets so illiquid in August and September last year leading to the run on Northern Rock. Our options have now been narrowed by the decision to nationalise Northern Rock. This has proved expensive to the taxpayer, boosting public spending still more, and has meant thanks to EU competition law that we are having to run down a leading mortgage bank at a time of mortgage famine and credit squeeze.

What should we now do? The Bank’s options are very limited. If we chase the historic inflation with higher interest rates we will make the credit crunch worse, and cause a sharper slowdown or a recession which seems a bad idea. If we take no action commentators may well say we are neglecting the high and persistent inflationary problem. This is mainly the result now of excess liquidity elsewhere in the world creating strong upward pressure on commodity prices. There is little sign of this spilling over into wage increases at home which would give another twist to the inflationary spiral. In due course it is quite possible the speculative froth in commodities will be corrected and ease the inflationary impact.

However, it is unfair that all the pressure of adjustment to harder times is currently falling on the private sector, with housing and property at the eye of the storm. I am very conscious of the government’s ambitions and high targets for new housebuilding, which are currently unrealistic. If the government wishes to rebalance the economy and ease some of the unreasonable pressure on property and finance it needs to reduce its own claims on the economy. I suggest the government redoubles its efforts, begun with the Gershon Report, to eliminate waste and less desirable spending from the large public sector, to help the adjustment . I would be happy to assist with this process, and can see many easy targets.

Yours etc”

An honest Chancellor would write back:

“Dear Governor,

Thank you for your letter. I agree we have made mistakes together, and we need to reform our system for inflation control. I wish to discuss with you strengthening the role of the Bank in managing the money markets by restoring powers to you to monitor the clearing banks day by day and to run the government debt. Like you, I now realise the Northern Rock decisions were not well made, and we need to be careful how quickly we run the business off.

The government is concerned about the state of the housing market. We see now that getting prices down to make housing more affordable does not allow more people to buy if the mortgage market has dried up. Nor does it help if people generally decide to sit tight rather than change their houses, as it limits choice and increases the number of families living in less suitable accommodation.

It will not be easy with colleagues, but I do see the force of your argument that too much of the adjustment is being taken by the private sector in general, and by the property and mortgage sector in particular. I think there is scope to reduce public spending without in any way damaging services. You are right in hinting that public sector efficiency and productivity can and should be raised. I will take your letter to Cabinet along with spending suggestions the Chief Secretary has been preparing on a contingent basis and see what we can achieve.

I agree with you that putting up interest rates now would be an inappropriate knee jerk response. I just hope you are right and that commodity prices start to subside. It will be uncomfortable to live through much more of this commodity boom, but I see no alternative that is less damaging to UK jobs and output.

Yours etc”