The myth of shale gas?

The NYT has a front page story on what could be called the myth of shale gas. Their reporting is that energy industry experts and documents suggest that shale gas will not be as economically viable as originally discussed or as currently presented in the popular press. There is less there there. The wells that have been drilled either are not producing at the levels expected, dry-holes, or have a shorter expected life.

This shale gas boom is now being called a potential dot-com bust for energy. Shale gas has to be tempered by the current price environment where gas continues to stay at low prices given the poor post crisis economic environment. Markets move to extremes and the current boom mentality is at extremes, but that does not change the fact that more natural gas is in the ground.

Wen Jiabao declares inflation victory - wishful thinking?

China's premier Wen Jiabao declared in an FT editorial that China is winning the fight against inflation. This is wishful thinking. China has made as a strong effort to tighten monetary policy after a surge in liquidity in response to the financial crisis. Reserve requirements and rates have been increased on a steady basis, but inflation has still been rising. The explosion of liquidity allowed growth to be renewed but also caused an increase in speculation and a general increase in inflation. Any cutback in liquidity takes time and China does not want to slow growth below 8 percent.

Any peaking in inflation may have more to do with the slowing of commodity prices. Now the commodity price increases have been tied to China growth, but there is still high demand for better food and energy. This commodity demand is associated with the overall size of the China economy and not just the growth rate. Hence, there will still be price pressure on commodity prices even if there is a slowdown in growth and less liquidity.

Many have declared triumph over inflation only to see it continue. Breaking inflation is never easy and prices have a tendency to move in their own direction. There is still a lot of liquidity in the Chinese economy so it may be premature to announce victory on the inflation war.

Shale gas is changing the world

Shale gas seems to be everywhere and that changes global energy power politics. It is in places all over the US which have not been known as energy centers. The shale gas in Pennsylvania is a case in point. It is close to major markets and does not need to be piped long distances. The same holds for Canada.

Now we are finding shale gas in Europe from France to Poland. There is shale gas in China. Whether this gas is economical is a different story. It is not clear whether fracking technology will work and what are the environmental costs, but it is very clear that gas can be found with the right technology and at the right price.

This means that the world dynamics of natural gas will change radically. Those countries that have been energy dependent on major gas producers will see new competitive forces. The US may become a natural gas exporter not an importer. Russia may not hold Europe hostage for natural gas. Natural gas may become a better alternative than solar or wind during a transition period. There arefew events tha will chnage energy politics and this is one of them.

Uncertainty is not the problem - a view on Cliff Asness

One of the more thought provoking editorials in the WSJ was written by Cliff Asness of hedge fund fame. He argued that uncertainty is not the problem with current poor economic growth but the poor policies that have actually been implemented.

Commentators have argued that the unknown has driven businesses and consumers to hold more cash and that if uncertainty was relieved there would be stronger growth. Asness states that poor growth is not associated with uncertainty but the set of policies that have actually been implemented in the last two years. The poor growth is further associated with the fact that certain policies will be implemented if the choice is given to the administration.

We can resolve current uncertainty very easily. Let's assume we tax the "rich" at a significantly higher rate, we increase financial regulation, we increase health care costs on business, we increase costs on energy usage, we increase regulation for labor to just name a few. These are all worthy policy that would be chosen by the administration if given the chance. Would the resolution of the uncertainty lead to stronger growth?

The conclusion of Asness is that this route clearly would make us worse off. The uncertainty on whether these policies will be implemented have not hurt the economy. In fact, the possibility that other alternatives will be chosen may be helping the economy.

Uncertainty cannot be a catch-all for bad results. Bad policy outcomes are associated with bad policies