Zeitlinks

The sky is falling on Wall Street, but here at Z’geist we try to find the silver lining. The crisis is giving us a chance to try out new branding strategies… what do you think of our new slogan??

ZEITLINKS: Now more reliable than complex financial derivatives!


Nick:
1. Segregation and the quality of government: Alberto Alesina has a great new article on how ethnic fragmentation undermines governance efforts. Read the whole thing and keep in mind colonial powers used to segregate ethnic groups specifically to strengthen their government by dividing any anti-colonial opposition.

2. Petraeus' Legacy: General Petreaus leaves behind an Iraq that has improved during his tenure but that still leaves much to be desired. Keep in mind that most of his success is premised on Iraqi insurgents being brought onto the US payroll. He has accomplished alot but military strategy is never the whole story.

3. A changing climate of opinion? The Economist has a wonderful piece outlining the more radical proposed solutions for global warming. Will these ideas go the way of the jetpack? Who knows but in the meantime they're interesting.

4. RIP David Foster Wallace: The literary giant of our generation has hanged himself. You will be missed. If you don't know this man, go buy Infinite Jest right now.

5. Palin has a cooking show?



Patrick:
1. McCain Financial Advisor’s Sunday Op-ed: I’m not a huge Wonkette fan anymore, but sometimes they just knock one out of the park.

2. John McCain’s “Big” Economic Plans: Mark Thoma has a look at what J-Mac says he’ll do to the economy.

3. Dilbert’s Poll of Economists on Obama vs. McCain: Tyler Cowen points to an interesting poll of economists’ political preferences. Notably, John McCain inspires much more confidence than Barack Obama in regards to international trade.

4. Dani Rodrik is blogging again: I’m sure someone will write a post on his new article soon. But his return to the blogosphere is one reason to be happy that summer’s over.

Crisis on Wall Street

The financial crisis has deepened on Wall Street. Yesterday, Rory at IPE provided a great overview of what happened over the weekend. Here at Zeitgeist, we’re following the developments quite closely. Lacking a purely financial background, I don’t feel qualified to comment extensively on much of what’s going on. The news is changing hourly, and I recommend that you to check in often at the following blogs: Free Exchange; Felix Salmon; Calculated Risk; and Economist’s View, among others.

I’m on more comfortable ground in regards to the political-financial aspect, and I have a couple thoughts. First, kudos to Hank Paulson for drawing a line in the sand about public bailouts in regards to Lehman Brothers. Moral hazard is an underlying quality of all government-private sector financial interactions. Lehman has been slowly dying for months, and investors have had ample time to readjust. The Treasury has taken a risk that markets are robust enough to weather its failure. However, if Mr. Paulson had allowed another Bear Stearns, the floodgates of federal money would have been much more difficult to close in the future, and it hardly looks like Lehman will be the last financial institution to come knocking. Conversely, AIG might fail in the next day or two if the insurance firm is unable to secure additional credit lines and is possibly another story. Mark Thoma weighs both sides of a potential bailout of the insurance giant.

Clearly new regulation is needed. The key here is that better, not more, regulation is needed. As Mr. Paulson has stated, the financial regulatory structure is a patchwork, hopelessly outdated, and simply not up to the task of 21st century financial globalization. This is an extremely complicated policy arena, and I’m very nervous that Congress isn’t up to the task right now. Congress often likes to be seen as “doing something”, but in this situation, uninformed debate and ill-considered new regulatory legislation will make things worse. Everyone needs to be as careful, and as level-headed, as possible. Perhaps this is asking too much: it is an election year after all. But further to that, I strongly agree with Megan McArdle that this should not be a campaign issue. This would have happened just as easily under a Democratic president as a Republican one.

Finally, on the lighter side of things: Donald Luskin, who penned a snarky and bitterly partisan op-ed in Sunday’s Washington Post about how well the economy is doing, is now a strong favorite to win the award for WORST. TIMING. EVER.

(photo by HKmPUA)

Fighting the man

An interesting paper by Rafael La Porta and Andrei Shleifer presented at Brookings this past week explores the connection between activities in the informal economy and economic development. 

Tyler Cowen agrees with the authors that the the registration and growth of official firms is needed to drive economic growth in the developing world. 

The evidence points to the dual view, with the fairly standard implication that the hope of economic development lies in the creation of large registered firms, run by educated managers and utilizing modern practices, including modern technology, marketing, and finance.

This seems pretty obvious in an ideal world where the governments are strong enough to enforce patent protections and thus maintain the level of quality necessary to ensure functioning markets. Obviously, transparency and registration would be ideal, but growth does not advance the way the textbooks predict and the authors fall prey to offering prescriptions that ignore the reality of too many developing countries. Capital flight, both human and monetary, is an all too real phenomenon in many developing countries and the high political risk often dampens the climate for FDI. 

The other problem with their analysis is that they ignore the fact that most elites in developing countries have earned their wealth by staying in bed with ruling politicians. As such, they have little interest in promoting the rule of law necessary to entrench the regulation necessary for the development of large firms. While it is true that the informal economy propagates a shadow regulatory structure (either as organized crime or a corrupt bureaucracy) required to ensure protection and continuation, the alternative of modern practice cannot be developed or sustained until education levels (and equivalent salaries) keep local talent. 

In the meantime, the informal economy keeps people fed and housed. It's a cycle that development professionals have been trying to crack for 50 years. Let's hope future prescriptions don't ignore the political and cultural constraints that economies actually face.

Lower oil prices make me nervous

I try to avoid making hard predictions on this blog, but regular readers know that I’ve recently made two high profile picks. I’ve argued more than once that political-economic fundamentals suggest that Barack Obama will win the Presidential Election in November handily. Admittedly, that’s looking a bit dicey at the moment, but I’ll still be astonished if Mr. Obama somehow manages to snatch defeat from the jaws of victory in the most favorable electoral climate in almost three decades. I will also petition that the Democratic Party disband and its leaders seek gainful employment in a completely different line of work. Further, I’ve argued that the new baseline for oil prices will be $100/barrel. In recent days, however, oil has crossed the Rubicon and is currently trading around $96. Does that mean I’m wrong?

It’s too early to say definitively, though I don’t think so. But there’s a larger problem: it could very well be a bad thing if oil prices continue to slip.

It is a fact that the global economy runs on oil. It is also true that right now there exists no substitute that could completely replace oil. Therefore, if the global economy continues to grow, which most people agree is a good thing, it also means that oil consumption will continue to grow, which most people agree is a bad thing. But without a substitute, the world will need more oil. 37.5 million extra barrels a day, to be exact, according to the International Energy Agency. That’s on top of about 85 million barrels consumed each day currently.

Without a substitute or sustained economic recession, that oil needs to come from somewhere. The problem, as I’ve mentioned, is that most of the ‘easy’ oil is already being pumped. In a fascinating article today, RI notes that most of the oil majors are pricing new investment projects at a cost of about $70/barrel, which they would like to sell at market for $100/barrel. Simply put, if the price of oil continues to fall, it is likely that they will delay these new investment projects, which could lead to a major supply gap in the future. Rather than a gradual rise in oil prices, we might see a disruptive spike.

Conversely, it is clear that in the face of accelerating climate change and higher energy prices, the world needs to develop renewable energy sources. Say what you will about Tom Friedman, he’s an ideas man and his new book looks like it highlights what will be one of the major political economy challenges of the coming era (n.b. I haven’t yet read it). However, as I’ve also mentioned, declining oil prices likely reduce the impetus for investment in alternative energies.

Understandably, oil companies want to keep selling oil for as long as possible. It’s what they know, it’s what they’re good at, and it’s extremely profitable. In Congressional testimony last week, the President of M.I.T. noted that oil companies invest less than 0.25% of their revenue in R&D, compared with 18% for pharmaceutical companies and 16% for semiconductor firms.

But this is ultimately unsustainable. Anyone interested in developing an energy substitute in a timely fashion must first acknowledge that the era of cheap oil is over. In my opinion, any prolonged forays below $100/barrel are just delaying the inevitable hangover, and very likely making it worse.

(Incredible picture by nzdave)

Tina Fey for President!

Tina Fey answers America's call...

Just google it

The news of a Google-Yahoo merger was floated some time ago but recent news that the Justice Department has hired special counsel to review the details of the case should not be surprising; in fact, it is more than welcome. The common view of our generation seems to be that Google is an enlightened despot, free to conduct themselves as they see fit due to the ease they have fostered in our daily lives. In a sense, their ubiquity has forced us to grant the company free reign to monitor, and target, our habits. 

But no matter how well they treat employees, or their corporate idealism, Google is still a company and their bottom line is what matters most. This is as it should be but regulators cannot lose sight of it. I don't know whether a Google-Yahoo deal would imperil competition but any such unprecedented corporate adventurism in new media such as the internet should trigger caution and excitement at the same time. The Justice Department is doing the right thing by excruciatingly checking the facts of the case. The internet will never be completely dominated by a company. There is always something new and room for experimentation - that is its inherent beauty. But the internet is still a media domain and we must realize the extent to which complete advertising control can stifle the expansion, not creation, of new entities. Google may have been the best thing to happen in a lot of years, but that doesn't mean something better isn't around the corner. Let's not shut the door too soon.

The LHC and the END OF THE WORLD

Has the Large Hadron Collider destroyed the earth yet?

If you need further reassurance, here's how one physicist summed up the likelihood of humanity being inadvertently destroyed by a miniature black hole of our own making:

Look, it's a 10^-19 chance, and you've got a 10^-11 chance of suddenly
evaporating while shaving.

(HTs: Free Exchange and Chris Blattman)

Taking stock of market efficiency

One of the most powerful arguments for markets is that they are the most efficient way to price assets and allocate resources. In macroeconomics, the efficient markets hypothesis of financial markets suggests that open markets strongly mitigate or even eliminate opportunities for arbitrage because market-determined prices already account for all known information about an asset.

With that in mind, an interesting paper released today by the NY Fed (HT: Mark Thoma) examines what type of news actually moves stock, bond, and FX markets. The authors find that only a few types of information (nonfarm payroll numbers, the GDP advance release, and a private sector manufacturing report) have a persistent and significant effect on market pricing. As Free Exchange wonders out loud, does that really mean that everything other piece of news is irrelevant or redundant?

In another sort of market, the contracts for Obama and McCain election victories are now roughly even. Interestingly, the contracts closely reflect the national polls. The problem is, the market ought to know that the US presidential election is anything but a national race. If you look at the state-by-state polling, many analysts currently have Mr. Obama with a much more considerable lead in the Electoral College; he’s even winning by a bit on Karl Rove’s latest map. It’s hard to surmise that the prediction market has adequately taken this fact into account, especially given the timing of the price rise on Mr. McCain’s contract (nearly mirroring his rise in the national polls.)

Furthermore, as a commodities watcher, I’ve seen many situations where the price does not reflect any logical interpretation of the supply/demand fundamentals. Go try and make sense of the international sugar market over the last two years if you don’t believe me.

What gives?

Zeitlinks

This week marks the traditional beginning of the General Election, and it’s a mad dash for Election Day. Oh, there’s also a lot of other stuff going on in the world, too.

Nick:
1. Democrats must learn some respect: The notion of a "culture war" implies that different social environments swing voters one way or another. It is a misnomer and a divisive tool but one politicians unfortunately need to understand.

2. The president's slender chance: Pakistan is in a tight bind. Is the solution really a corrupt, unstable politician who rose to prominence on the coattails of his wife's political legacy?

3. Cooking your way into court? Thailand's Prime Minister Samak Sundaravej was forced to resign because he earned income from a popular, national cooking show. In other news, Anthony Bourdain announced his Presidential candidacy this morning.

4. Gotta love Fox News...


Patrick:
1. How Oil-Rich Countries Guard Their Wealth: This underscores some of the points I’ve argued previously about why we’re unlikely to see a prolonged drop below $100/barrel in oil markets.

2. What if we didn’t bail out the creditors? Angry that Uncle Sam (using your tax money) is now taking control of Freddie and Fannie? The alternative is much, much worse.

3. The 20 Questions we would ask Sarah Palin: You’re kidding yourself if you think she had cogent answers to 90% of these foreign policy questions a month ago. (Does she even have them now?)

4. Is Kim Jong Il dead? A Japanese professor argues that he actually died 5 years ago. Spooky, scary.

Tread carefully

Human Rights Watch reported today that civilian deaths in Afghanistan tripled from 2006 to 2007. The main culprit? US and NATO air strikes. Unfortunately this is a trend that has continued unabated in 2008. These developments are more than "regrettable" but spell serious trouble for military efforts in the region.

As strikes continue to kill more and more civilians, the US is fast losing support, not only from the Afghan and Pakistani public, but also the governments of both countries. The recent death of 90 civilians - confirmed by the UN - has led to increasingly tough rhetoric from President Karzai and the recent border crossing strikes in Pakistan are leading Zardari, soon to be President of Pakistan, to step up criticism of US and NATO efforts.

Unless the US is careful and starts heeding the very warranted criticisms of both Presidents, then we will soon find ourselves lacking allies and support in the region. Using targeted strikes instead of increasing troop levels is the right move; I've noted this before. But our forces must take great care to verify intelligence before bombing these frontier areas. Any semblance of success hinges on cooperation and support from the independent tribes that inhabit the border region between Pakistan and Afghanistan. This vital section of the populace will not stand for many more civilian deaths...nor should they. As politicians continue to gather support by distancing themselves from American efforts, this administration must realize that our focus should be winning the hearts and minds of the populace. Small, focused special forces groups are the right approach to purging this area of radicalism. While air strikes by drones may decrease the risk to our troops they lack the capability to define civilians and assess information gathered on the ground. Increased intelligence will win this war but don't expect civilians to offer much help if we keep killing their families.

(AP Photo)

To the shores of Tripoli...

Condi Rice arrived in Libya today to meet with the country's leader, Col. Muammar Qaddafi. Though he may not house pirates, and is no longer an official terrorist, Libya is still a country with a long way to run. Encouraging as it is that Rice is the first American official to visit since Nixon in '57, the meetings will not, and should not, be all hassa.

Don't get me wrong, Libya is one of the most successful revisions of the past twenty years. Transitioning from nuclear armament and state-sponsored bombings to an embrace of capitalism is a mighty task in any society. But like Cuba, Libya is another example of an authoritarian state embracing market reforms. Leezza, as Qaddafi apparently calls her, must keep in mind that despite their leader's recent change of heart, the Libyan people still face a startlingly high level of oppression.

While it is true that Italy's recent colonial apology "smacks of self interest", that does not mean it should be ignored. Strategically speaking, the US would be irresponsible to ignore Libya's tack to the center just because of Qaddafi's continuing rule. The country controls too much gas and oil that Continental Europe and China are actively pursuing. The US should take measured and sensible steps to engage in this process. Rice must normalize diplomatic relations so American firms can actively participate in the run for foreign investment but attach conditions (human rights, greater press freedom, etc) to any direct government aid. While it may be unsettling for an older generation that remembers Pan Am 103 or, like McCain, the Tripoli pirates (too harsh?), to get used to the idea of Libya as a trade partner, we must welcome Qaddafi into the fold of global capitalism and use the subtle sway of our dollars to encourage greater transparency and freedom.

I personally will follow this with cautious optimism and hope that this story serves as a model for today's failed states that look like Libya did 20 years ago. I'm talking to you North Korea.

Zeitlinks

Here's a few internet tidbits to distract you from the Convention overload. And don't worry...Zeitgeist won't be live blogging anytime soon. Unless, of course, we somehow get Redskins tickets for tonight.

Patrick:
1. Storm clouds over the oil market: This is a point I made last month: falling oil prices are indicative of further economic trouble. As the FT puts it, “even good news is bad.”

2. Making globalization work: skills, families, unions, and the welfare state: Via VoxEU, Richard Baldwin gives a great overview of the ‘new’ globalization. See also Trading Tasks: A Simple Theory of Offshoring by Gene Grossman and Esteban Rossi-Hansberg.

3. Top food exporters ease restrictions: Reading this, I remembered that Russia is one of the world’s most important wheat exporters – any chance we’ll see grain diplomacy in the near future?

Nick:
1. The Way the World Sees Africa: Wait a second...there's no tigers in Africa??

2. The Legend of a Democracy Promoter: In a wonderful treatment of Bush's future legacy, Amy Zegart breaks down the differences between the two unpopular Presidents. Keep in mind that Bush's round of democracy promotion is aimed at countries with little record of widespread political participation whereas Truman used economic methods to boost democratic principles. Not only that, he lost China and North Korea. (Hat tip: Drezner)

3. An Immodest Proposal: Just what kind of party would a sex tax cause? Too much?

On politics, pundits, and prediction markets

I don’t often like to delve into the day-to-day horserace politics of the presidential campaign, although I follow it just about as closely as anybody (one reason it is great being back in Washington.) However, I do feel compelled to make one observation, given the upheaval on all sides after Ms. Palin’s barnstorming speech at last night’s RNC.

Back in July, I wrote a tongue-in-cheek post about how buying Obama Presidency contracts in the prediction markets would be a ‘lock’. My observation was based on a number of presidential race forecasting models which, given our nation’s current perceived economic malaise and the unpopularity of the sitting Republican president, predicted a cakewalk for Mr. Obama. I don’t consider myself a particularly partisan individual, and I won’t explicitly endorse one candidate or the other until much closer to Election Day (though if you read regularly, you can probably tell which one I lean towards). But if you asked me right now from a financial standpoint, I’d still tell you that buying Obama contracts is a smart investment.

As in commodities markets, stock markets, or bond markets, prediction markets are driven by both long term fundamentals and day-to-day news. When it comes to Election 2008, unless you’re trading professionally, you probably don’t need to worry about shorting either candidate. What this means effectively is that you can ignore 95% of what the punditocracy says. Their livelihood depends on keeping their ratings up, which in turn depends on you watching their television shows and reading their articles. You’re much less likely to do this enthusiastically every day if it looks like one candidate is going to win handsomely. In other words, pundits have a personal incentive to make you think the race is closer than it is. Pundits’ careers also extend beyond this race, and they have a reputation to preserve. Even election managers are looking for employment in the next campaign: if for some reason Mr. Obama did lose, and they had been saying the race wasn’t even close, how does that bode for their future job prospects?

But that doesn’t mean you have to listen to them. By nearly any metric you care to use, the long term fundamentals of the election strongly favor Mr. Obama. Most strikingly: voters think the economy isn’t doing well, and the sitting Republican president has been in office for 8 years and is deeply unpopular. This election is Mr. Obama’s to lose. Don’t believe me? Check out the election map at Pollster, which depicts, in my opinion, a nearly impossible scenario for Mr. McCain.

My advice if this election is stressing you out? Take a birds-eye view of the campaign. Check in once every two weeks for a (weighted) national poll and polls in the swing states, check the monthly fundraising numbers, stay tuned for the big announcements, and watch the debates. Most of the rest is filler.

Oh, and maybe think about buying that Obama contract…

(Photo by jmtimage)

An-arrrr-chy

There was news today that Somali pirates hijacked a French yacht and kidnapped two French citizens in the Gulf of Aden. (Look at the header, between the 'i' and the 's' of the word 'Zeitgeist'.) It is perhaps a lesser-known fact of the global economy that maritime piracy isn’t confined to Disney Movies and the Days of Yore. Piracy is one of the world’s oldest professions, and it’s still a serious problem: this is the 30th such attack this year in one of the world’s busiest shipping lanes. There’s also very little romantic about it: think less Jack Sparrow and more heavily-armed, ruthless thugs. Modern tactics include kidnapping, extortion, and bribery.

Piracy is a symptom of lawlessness and weak maritime power. It’s no coincidence that the Gulf of Aden is located in the territorial waters of Somalia, which hasn’t had a functioning government since the early 90s. Piracy also flourishes in the waters of Southeast Asia, where local law enforcement will sometimes turn a blind eye for a cut of the profits. And what a profit it can be: in 2006, piracy costs the global shipping industry around $16 billion.

The US Navy announced in August that it would begin patrolling the Gulf of Aden again in an effort to disrupt piracy there. How much difference this will make is unclear: the US Navy has intervened against pirates in the past. But the attacks continue and have even spiked in recent years. As mentioned, there’s a lot of money to be made, and world geography has created natural shipping lanes. Sometimes it is difficult or costly to avoid the chokepoints where pirates operate.

Perhaps the global community should consider re-legalizing privateering?

UPDATE: Looks like Blackwater is one step ahead of us yet again. Curse those wily mercenaries! (Hat tip: John Thorne... word on the street is he may resurrect his amazing blog, Whiskey Tango Farley)

(Image: Blackbeard’s flag, linked via Lighthouse Patriot Journal)

Tata's fall :: China's rise?

Late last year Tata motors unveiled production plans for the Nano, what was to be the world's most affordable car with a retail price tag of $2,300. Their plans were derailed today by farmers protesting land acquisitions in the special economic zone of Singur, home to one of three Nano factories in India. The debate has been brewing since the government "bought" the land under a 2005 economic expansion policy. It is certainly reflective of the tense nature of labor relations in India but more tellingly, the outdated nature of the Indian bureaucracy and government.

From my own experience in India (and this can be confirmed by anyone who has worked or lived there), anything the government runs is insanely slow. Employing three people to sell someone a stamp and five people to check your train ticket (not to mention the 4 porters relying only on tips) reflects the far reach of the government and its' woeful inefficiency.

Not only is this frustrating but, as Arvind Subramanian explains, it also spells danger for India's growth and development (especially when compared to China). India is certainly ahead of China in education achievements and political freedoms, but unless the government can be streamlined by selfless reformers (about as likely as it sounds), the country's growth will slow in the coming years. The bureaucratic institutions are a legacy of the British and provided many jobs in the early years of Independence but unless the government can discard this colonial legacy the institutional stagnation will lead to economic stagnation. As Subramanian says, it is easier to create markets than improve a state's capacity. That's good news for China and bad news for India. 

Implicit implications

Martin Wolf had a fantastic column today in FT laying out what the 2008 presidential election means for the world at large. You should certainly read the whole piece but Mr. Wolf correctly takes the position that this election will greatly influence the world's development in the next quarter century. The piece certainly reads like an implicit endorsement of Sen. Obama. Wolf is prescient in saying that

the right approach for today's complex world is not that of those who see agreement and appeasement as synonyms. The choice seems clear. It will shape our era. 

In a world where everyone seems to have embraced market capitalism, the great challenge for the next administration is "managing the shifting global power balance." Both Fukuyama and Wolf are correct in understanding that a hegemon continues to exert influence and maintain control not through direct use of force but through coercion and eventual consent of the "commons". 

Bomb, bomb, bomb Iran doesn't seem like the slogan of a leader who understands how to use such a subtle type of force. Like Mr. Wolf, I won't name names but you can read this the way I read him. 

(Image by M. Thompson)

Zeitlinks

Well folks, the summer’s finally over and it’s time to get back to work. Here’s some Zeitgeist-approved reading to ease the pain of la rentrée and help you look smarter than your colleagues.

Nick:
1. Obama's 10 worst ideas: A succinct and fair treatment of Obama's most obvious missteps. It's somewhat scary that the two most important issues of the election - the economy and energy - make up most of his problems. McCain is next week...gas-tax holiday anyone?

2. Arctic Island: Let me guess this straight. The Artic is free of surrounding ice for the first time in 125,000 years and the WSJ is primarily reporting on the "potential boon for...shipping companies"? Does anyone else see a problem with this?

3. The Digital War on Poverty: Sachs outlines the uses, implications, and lessons of mobile phones and the internet in the developing world. Fascinating stuff. Gotta love leapfrog technologies.

Patrick:
1. Renminbi rise ‘less necessary’: With a surging dollar and a declining Chinese trade surplus, does the renminbi need to continue appreciating against the dollar? This article also highlights one of China’s new worries: short-term capital flows (aka ‘hot money’).

2. What must happen to fully rebalance the US current account?: From VoxEU, a great short piece on the continuing global rebalancing of trade flows.

3. The global consensus on trade is unravelling: I meant to share this Larry Summers piece last week. Powerful, troubling stuff and a must-read.

Slumping oil

It looks like Hurricane Gustav wasn’t the “storm of the century” (I think that one’s pretty much locked up), nor has it caused “rain of biblical proportions”. This is not to downplay the storm’s impact: it has done some significant damage, but relative to what was expected, I am relieved for the residents of the Gulf Region. From a commodities perspective, the hurricane has come and gone without doing much damage to Gulf energy production infrastructure. The result? Oil prices have tumbled about $10.

Last month, I wrote about why I thought oil prices would stay above $100 from here on out. However, some of what I’ve read in the past couple days suggests that Gustav could be a turning point for oil markets. Now that the largest natural disaster threat to prices has passed without causing much damage, the thinking goes, the price will continue to fall. I’ll note two things: the long term supply/demand fundamentals I talked about last month have not suddenly changed, and they still suggest a bullish price outlook on oil. Second, if oil continues to fall at this point, it suggests to me that the market thinks it’s still overpriced. I’m not sure that’s the case.

At this point, I stand by my assertion last month that absent a major change in supply/demand fundamentals, oil at less than $100/barrel is unlikely for any extended period of time. You’ll recall that I also wrote about the volatility of modern oil markets: perhaps we’ll see a dip, followed by the price rising back up.

Let’s all keep watching: like most everybody, I’m an oil consumer and not a producer or trader, so I’d be quite happy if my predictions prove to be wrong.

You just took one in the jugular!

Given my co-author's discussion of Russia's resurgence, I found this interesting. 

Just as Putin was arriving with a group of wildlife specialists to see a trapped Amur tiger, it escaped and ran towards a nearby camera crew, the country's main television station said. Putin quickly shot the beast and sedated it with a tranquilizer gun.

I'm not sure if Putin is sending a message, but Vlad does look pretty tough in camo.

(Photo: Reuters)

Russia-EU relations: a bang or a whimper?

The Russia-Georgia war continues to have repercussions: EU leaders gathered in Brussels today for an emergency summit on the state of relations with Russia. Last month, I attempted to apply a rudimentary public choice model to the major players in the conflict. At the time, for simplicity’s sake, I treated the EU as a single entity with a unified policy position. In reality this could not be further from the truth. There are hawks, such as the previous Warsaw Pact members and the UK, and there are doves, such as Germany and Italy. In determining a member nation’s stance, it is useful to look at two metrics in particular: history and energy. Specifically, has the country been pushed around by Russia in the past (pretty much all of Eastern Europe)? And how much Russian energy does the country import? Personal relationships also play a role: Vladimir Putin and Italian Prime Minister Silvio Berlusconi are close friends, for example.

Where do the Russians stand? I’m troubled by the implications of their explicit declaration of ‘spheres of interest’. However, I still think it’s possible to at least partly understand Russia’s motives through the looking-glass of its leaders’ personal incentives. This is a view that I first heard espoused by Garry Kasparov in 2007 and again last week by Richard Baldwin. It’s certainly true that Russia’s political elites are making an enormous amount of money off of the country’s economic expansion, and they’re aware that war would disrupt this trend. As a friend of mine once put it, capitalism in Russia is like the Wild West: poorly regulated, corrupt, winner-take-all, and unprotected from government intervention. In such circumstances, powerful political actors are well-positioned to get rich. While stoking the fires of nationalism will help solidify their leadership, outright war is undesirable because Russia might lose and the economy might tank. Thus, I suspect that Russia’s leaders won’t push things too far (I’m being purposefully vague), as doing so would be against their own interests. In any case, Russian stock markets have already been majorly spooked by the war and other recent events.

And where does this leave us? For the time being, I suspect that ‘pragmatism’ on all sides wins the day. The EU stopped short of applying sanctions: the last thing that leaders in flagging economies want is to be on the wrong side of high-stakes energy diplomacy. Still, the rarity of such emergency EU summits signals that they’re taking this seriously. Russia, in turn, is quite reliant on the EU for its export market (which feeds into the reasons mentioned above). Is this the right policy for the EU to be pursuing? It’s doubtful: I think the EU ought to be taking a tougher line, and it still might if it can get its own ducks in a row on the appropriate policy response. This is something to keep watching.

(photo by dbarronoss)