On "Perfect Storms"

Today, I came across a news article explaining elevated oil prices as being due to a "Perfect Storm" in the oil markets:

"Supply-side issues, particularly the problems around Iran, and demand-side issues, especially very strong Asian and Chinese demand, will help take prices higher.  A weak U.S. dollar adds a final drop"  

It got me thinking back to an economist cover from around this time last year:

News at the time described a "Perfect Storm" as well:

"Tensions in the Middle East and Libya show no signs of abating. Japan is dealing with post-earthquake rebuilding and major nuclear issues. And the U.S. is entering prime driving season."
"It is truly the perfect storm right now," said James Cordier, president at Liberty Trading Group. "I've never seen anything like it -- the news just isn't stopping."

In 2008, there was another "Perfect Storm", this time blaming:

"The forces behind the meteoric price rise this spring are slowly receding. Nigeria has boosted output by 200,000 barrels a day (BPD) this month, making up most of the shortfall caused by rebel attacks on pipelines in April."
"Like the rest of Opec, the Saudis blame "speculators" for running amok, pushing paper contracts into the stratosphere."

In 2005, the Harvard International Review described the "Perfect Storm" as the result of, among other things:

"OPEC lost control of oil prices in 2004. In the first three quarters of 2004, the OPEC basket price remained above US$40 per barrel, although it fell slightly below US$40 per barrel in September. A series of factors contributed to these developments, which have been characterized by observers such as Edgard Habib, chief economist at Chevron Texaco, as a "perfect storm." Factors included a largely unanticipated surge in oil demand spurred by high economic growth in China and the United States (estimated at 13 percent and 4.5 percent respectively in 2004 by Deutsche Bank), low oil inventories, deepening violence and instability in Iraq, declining OPEC spare capacity, and bottlenecks in the gasoline market due, in part, to stretched refineries."

I would argue that "Perfect Storm" is the wrong term for what the oil markets are experiencing.


   perfect storm

1. A particularly violent storm arising from a rare combination of adverse meteorological factors.
2. A particularly bad or critical state of affairs, arising from a number of negative and unpredictable factors.

The fundamental problem is that there is very little wiggle room in the global supply of oil.  Production has stagnated and could very well be in global decline.  In the face of rising demand in the developing world and inelastic demand in the United States, prices are going to remain elevated and should be expected to grow relatively steeply well into the foreseeable future (with periodic crashes as the economy stumbles under the weight of the burden).  There is nothing coincidental or unpredictable about this.

The unpredictable bits, attacks on oil pipelines, instability in the middle east, growing demand in the developing world, have always happened.  But their effects were never characterized as a "Perfect Storm" until their effects were felt in the context of perpetually constrained supply.  And that macro-economic trend, growing demand in the face of constrained supply, is here to stay.

The CNU's Live/Work/Walk Initiative

This week, I became a member of the Congress for the New Urbanism and attended the kickoff of the Live/Work/Walk Initiative :)

The basic problem being addressed by the initiative is that current Federal lending standards dictate that new development cannot include more than ~15% commercial space. This has distorted the market by diverting new development towards single family homes and high-rises. In a small urban area, such as Mt. Clemens or Royal Oak, MI, it is prohibitively difficult to secure financing build new 2-3 story mixed-use (Apartments on top, shops on the bottom) buildings along the commercial corridors. This is tragic because it essentially forces people to spend money on gas and time in traffic, when they could walk downstairs to work.

Prior to the involvement of the federal government in real estate lending, banks preferred mixed-use development as it allowed them to hedge the risk of a downturn in either the commercial or residential property markets. Banking followed the path of least-personal-risk and bent their lending standards to those of the Gov't-backed entities. Single-use is still the more risky option, just not to the bank whose loan is now backed by the American taxpayer. The CNU wants to modify the restriction to relax the restrictions on commercial space. This requires no government funds and would clear the way for private investment in our historic, walkable urban centers.

This is a Forbes summary