Tuesday, July 15, 2008

The not so good news: crude fails 5% to below $140.

Crude oil jumped to record highs above $ 147 on July 11 driven by political and economic concerns after Iran fired intercontinental ballistic missiles to signal its willingness to use military force to resolve regional geopolitical conflicts.  Crude prices, of course, are always sensitive to geopolitical conflicts in the Middle East.  For a more comprehensive history of oil prices, see the excellent summary at WTRG Economics.Oil_prices_since_1947

Yesterday, however, crude oil slide below $ 140 a barrel, losing more than 5%,  the largest single day loss in the last 17 years. Commentators attribute the loss to investors fleeing energy related stocks and commodities, reasoning that the rather severe US economic downturn would reduce demand for fuel.  MarketWatch report

The US economic troubles, particularly in the housing and now the financial sector, are remarkably severe.  Last week, AP reported that mortgage foreclosure filings in June increased more than 50% over last year's rate.  Economists expect 2.7 million homeowners to receive foreclosure notices in 2008 and more than half are expected to actually lose their homes.  MercuryNews/AP report    More and more foreclosures are likely due to continued job losses, housing prices that are plummeting in some markets, slow home sales, and increasingly tight mortgage lending restrictions.

The rapidly accelerating foreclosure problem has created a crisis in the financial markets.  :the $4 - 8 billion failure of IndyMac on Friday was one of the largest bank failures ever, occurring after a precipitous drop in its stocks.  The graph below on the left showing all stock price data for IndyMac and the graph on the right showing data for the last year demonstrate just how precipitous the cliff was for IndyMac:

Indymac_bankcorp_all_2Indymac_bankcorp_1_yr

 

Despite the federal government pledge Sunday to bailout the secondary mortgage giants of Fannie Mae and Freddie Mac by extending more credit or buying a stake in secondary market firms, the firms' bank financial strength ratings have been slashed and investors continue to flee from their stocks. Forbes/Thomson Financial News Though the chair of the FDIC assures us that Fannie Mae and Freddie Mac are well-capitalized, they are reportedly leveraged to the tune of nearly 70-1. 

And the continuing decline in their stock prices as of yesterday (reflected in the 1 year charts below -- click on the charts for larger pop-up images)Freddie_mae Fannie_mae_1_yr as of yesterday continues today. 

Emergency rules issued today  restricted short sales of the two firms, but did not stem investor flight today as Freddie Mac lost $1.85, falling  26% tdoay from $7.11to $5.26 and Fannie Mae lost $ 2.66, falling  27% from $9.73 to $7.07. Bloomberg report

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And the rest of the banking sector is suffering, with some regional banks on the verge of becoming dollar, if not penny, stocks and the largest banks experiencing similar losses. National_city_corp_1_yrWamu2 Wachovia_1_yr_2









The weakness of smaller and regional banks such as National City Bankcorp, Washington Mutual, and Wachovia stock prices are illustrated by the 1 year stock price charts above.


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And the larger national banks, Bank of America, Wells Fargo, and Citibank, have a similar stock price trend, as shown by the 1 year charts below.
Boa_1_yr Wells_fargo_1_yr Citibank_1_yr









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And the primary brokers are also suffering (as shown by the 1 year stock price charts of Lehmann Bros. and Merrill Lynch on the top and Morgan Stanley and Goldman Sachs on the bottom).

Lehmann_bros_1_yr Ml_1_yr Gs_1_yr




Gs_1_yr

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So, what does this have to do with environmental law?  Frankly, global poverty and ecological integrity are difficult enough to achieve when financial times are good.  When US gas prices rocketed over $4 gallon, carbon taxes and even carbon caps based on auctioned marketable rights became more politically more dangerous.  And attention shifted from achieving energy independence and carbon neutrality to reducing gas prices.

Yet, it is precisely the tendency of banks and other corporations, responding to the short-term incentives provided by stock markets, to engage in long-term economically and socially destructive behavior that caused the US financial crisis.  Business really is its own worst enemy sometimes...and ours.


             

 
    

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Comments

Re: WTRG
I think more complete and up-to-date sources can be found, in particular:

http://www.theoildrum.com/node/4291 Peak Oil Media Guide - a nice short description
http://www.theoildrum.com/ : The Oil Drum home page

http://www.lastoilshock.com/ : The Last Oil Shock

It is surprising to see a discussion of oil futures that doesn't mention Peak Oil, even if only to try to explain why someone thinks we are not, right now, in the Peak Oil plateau of conventional oil production, after which world oil production goes down (with the usual jiggles).

Understanding this is VERY IMPORTANT for environmental issues: if we don't take very fast action to reduce the need for oil, from desperation the world will end up burning more coal, and doing coal-to-liquids, and these are not good for CO2.

Not everyone believes in Peak Oil.
I certainly do because:

1) During the 1990s, I probably helped sell $500M of computers to oil companies worldwide, so I spent a lot fo time with petroleum geologists.

2) I've studied, among others:

Kenneth Deffeyes "Beyond Oil"
Mathew Simmons "Twilight in the Desert"
David Strahan "The Last Oil Shock"

3) I follow The Oil Drum.

4) And I have two friends who are quite sure Peak Oil is here already or coming soon:

one is ex-Chairman of Shell Oil
other is ex-Vice-+Chirman of Chevron, responsible for all exploration and production

What I think is:

a) We have a *demand shock* in progress, where the demand is rising [China, India, more internal use by oil exporters) while the supply is more-or-less flat.

b) We have not yet seen the supply shock, where the total production shrinks ... but we will probably start seeing it next decade.

c) and I don't expect world oil production to *ever* get significantly higher (say 10%).

Thinking oil will go back to its historic $20-$30 price range ... is a catastrophe.

Posted by: John Mashey | Jul 16, 2008 12:07:34 AM

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