Sunday, August 30, 2009

Natural Gas Price Down 80%!

Mark J. Perry, Professor of Economics at Michigan, is my favorite blogger (top link on my list).  He does a great job of converting economic news into valuable pictures.  Below is his chart showing an 80% decline in the price of natural gas!....

.... Please note that the inflation adjusted price is down to the same general level it reached prior to the great stock market boom of the 1990's; a boom that happened after the failure of the congress to pass government takeover of the health care industry.  History does not repeat but it sure does rhyme.      

In 1848, Karl Marx, in "The Communist Manifesto" predicted that capitalism would die, like the previous economic system of feudalism, because of internal tensions.  From 2005 to last summer, there was growing internal tension in the USA as a result of rising fuel prices during an unpopular war.
Today, Obama is pretty much following Bush's international policies.  Calling the war in Afghanistan a war of necessity does not make the fight different.  Our Generals are calling for more troops and Obama will probably send them.  This week, when Germany and France stepped up pressure on Iran, asking them to suspend development of nuclear weapons, it put the USA's pending deadline back in the news.  Due to lower oil prices, the idea that Obama can talk Ahmadinejad into standing down is less silly than it was during the election campaign.  Back then, despite the nativity displayed, everyone wanted to believe that Iran was ready to be reasonable.
The end of the clunker program, the pending cap and trade and health care budget battles, the "Iran complies or else deadline", the unprecedented market move of the past 6 months and the historically poor market performance in September makes it difficult for one to be optimistic about stock market prices.  Good investors always buy when the majority thinks it best to sell.   
Energy shares remain at the other end of the see-saw from technology shares and as the chart above shows, the pressure on energy prices should hold back gains in energy shares.  In 2005, the USA was in a rush to build the massive infrastructure needed to import liquefied natural gas and before the 2008 elections the republican chant was "drill, drill, drill".  Several years of drilling and new shale fracturing technology has made trillions of cubic feet of natural gas economically recoverable.  Today, our natural gas supplies are so abundant that the newly built infrastructure is being used to export natural gas from the USA!  This winter, natural gas will be substituted for fuel oil wherever possible.  With nonillions of  methanogens on our planet, I believe our natural gas supplies will never run out. 
80% Down --- 80% Up  
Because of the economic law of substitution, the 80% decline in natural gas prices will gradually pull oil prices down and the decline in oil prices will push the price of technology shares higher.  The increasingly rapid move to digital delivery of previously physical goods will assist in pushing oil prices down and companies that specialize in digital delivery up.
Lower fuel prices and lower priced goods (including the substituted digital goods) are also consistent with the rapidly improving credit quality of mortgage backed securities.  The very securities that caused massive losses at banks are now soaring in value.  The biggest market winners of late have been companies that insures mortgages, such as AIG.  Banks have also seen dramatic share price increases.  The KBW index is up 140% from the bottom!
More than 100 years ago, Victor Pareto, the Italian Economist who discovered the 80/20 rule, was frustrated by the ever present corruption in political systems and by the inequality present in capitalism.  The 80 twenty rule says that 80% of the wealth will be owned by 20% of the people,and, as Professor Perry notes, 80% of the home runs will be hit by 20% of the ball players.  If you follow the distribution to the second quintile, you find the even more frustrating truth that 40% of the people will own 92% of all the wealth, leaving 60% to share a meager 8%.
America is generally either a very generous nation or one that is willing to go the extra mile to protect our interest.  We desire the continuation of the free enterprise system.  Either way you look at it, we spend our blood and our treasure to defeat "the bad guys".  As a result, the "natural" 80/20 rule does not hold in regard to international economics.  In the year 2000, America had 5% of the world's population and 27% of  the world's net worth.  Asia had 53% of the population and only 30% of the worlds new worth.  The numbers are not balanced but they are not nearly as top heavy as the rule would suggest.  Europe had 10% of the worlds population and 27% of the worlds net worth.  The 20% richest countries held about 59% of the worlds net worth.  The poorest of continents, Africa, had 11% of the population and only 1% of the net worth.  Perhaps the surprise is the Middle East, which has 10% of the population and only 5% of the net worth.
Africa is certainly poor but help is on the way.  There are 4 underwater cables headed to Africa to support its growing Internet traffic.  The light is finally beginning to shine in the most isolated areas of the world.        
The best news on the international front is that lower oil prices will put extreme pressure on Iran to comply with international demands.  Iran does not want to be left out in the cold in regard to nuclear power.  Dramatic price reducing technological improvements in nuclear power have both oil rich and oil poor countries scrambling to be "nuclear clean".  Ironically, more pressure will be on oil prices when a steady stream of nuclear plants start coming online.  China, India, Russia, South Korea, France, Japan and the USA are all sharing nuclear technology with countries that have pledged to work only toward the peaceful use of nuclear power.
Energy prices are lower than they were and are headed lower.
The public will purchase electronic gadgets to reduce the amount of fuel they use and their cost of living. 
There has been no change in regard to corruption in government.  
Most likely common sense will prevail and the nonsense of the cap and trade energy tax and government run health care will not pass.  
Large amounts of money will be made by those who invest in companies that specialize in or aid and abet the delivery of electronic information (music, text or video).