Jan

23

Stock prices reflect the marginal value of traded stocks — where a stock's sellers and buyers meet. In M.U.L.E., the great Atari game from the 1980s, sellers use joysticks to move their icons down the screen to show the price they are willing to sell for, while buyers move their icons up the screen. When the two icons touch, transactions take place at that price. Either player can move their icon away to stop transactions. But the price for trades reflects only goods traded, not the entire inventory.

Similarly, the price of houses in "booming" or "collapsing" times shouldn't be stretched to value an entire area's housing stock. The market price of homes represents the marginal prices for houses for sale. In Seattle, Miami, Los Angeles, and other cities where demand for houses has been strong, state and local regulations long delay builders' efforts to construct new housing. The limited stock of houses for sale and the artificially restricted stock of homes allowed to be built make up the supply side of the market. In economically more free cities like Wichita and Houston, builders develop and build new homes faster when demand expands.

So housing prices jumped 20% in Los Angeles, Miami and Washington DC in 2005, and only 5% in Houston, Atlanta, and Dallas. These price increase differences reflect the limits on new houses in growing but regulated regions compared to less-regulated regions. Regulations delaying housing construction also push price swings wider. Major new housing developments come on the market years later, feeding the boom and worsening the inevitable downturn. Prices send signals that would coordinate behavior, with higher prices leading more homeowners to sell and homebuilders to build. But governments dampen and distort these price signals through regulations and taxes.

The House of Oil

Regulations in the oil industry delay development of new oil supplies around the world. While the Chinese economy is blamed for driving demand for oil, it is the Chinese, Russian, Saudi, Iranian, Venezuelan, Nigerian, Angolan, and other governments that mismanage oil operations and development. Expanded economic freedom in China, India and elsewhere boosts oil demand, but new production is constrained by the corruption and incompetence of governments around the world. (The sharp drop in oil prices in the late 1990s also played a role as major oil companies downsized, slowing efforts to restart various exploration projects.)

The U.S. government continues to play its part mixing state intervention with energy entrepreneurship. Among other blunders, state and federal governments restrict oil exploration and development in the near 50% of Western land it controls, as well as coastal waters out to 200 miles, and Alaska.

Government ownership and regulation of oil exploration and development has played a major role in recent oil price increases, along with fast growing demand and the slow ramping up of exploration and development (after the extreme downsizing of the late 1990s). These artificially high prices are pushing vast expansion in oil, tar-sands, and ethanol production. As these new oil and oil-substitutes come on-stream they will probably push prices hard. The high prices are pushing a vast expansion of oil drilling equipment as well (how many companies in China are now manufacturing oil drilling equipment? 50? 100? 500?).

Consider that everyone in the oil industry, from multi-billion dollar corporations to guys with single rigs, just five years ago planned for $15-$20 oil. At $40-$50 a barrel, a whole new range of oil development materializes, along with a wider range of oil substitutes. It used to be official Saudi oil policy to keep oil prices below $25 a barrel to discourage just these production expansions, as well as to discourage wider conservation technologies.

(A recent Economist article on a new cow-dung powered 100 million-gallon-a-year ethanol plant, reports that when the 73 ethanol plants under construction are added to 110 current ethanol refineries, they will supply 11.4 billion gallons a year ("Even in Texas" January 6, 2007. p. 26). Of course federal subsidies fuel these plants, along with cow-dung. Happily for the oil industry, ethanol supplies, though a drain on taxpayers, are unlikely to push down gas prices — it seems producing ethanol consumes as much or more energy as is contained in the final product.)

So like housing price swings in statist cities, oil price gyrations reflect not just shifts in demand but worldwide government control and intervention. The U.S. government responded to high oil prices in the 1970s by both subsidizing and heavily regulating oil shale development in Colorado. Tar sands development in Canada faced less regulation. Maybe new oil shale technologies will find ways around regulations to release shale oil in significant quantities this time. But why risk such investment? The Colorado or federal government could re-regulate, tax, or just ban oil shale as a source of intolerable greenhouse gases, or perhaps for endangering some newly-discovered spotted toad.

Meanwhile, high oil prices encourage infinitely diverse conservation efforts worldwide, many private and effective, others government-sponsored and foolish. For those who lived through the oil crisis and ensuing politicization of energy in the 1970s, it is deja vu all over again.

(Add color for the 200 miles of coastal waters the government now controls. Oil production is allowed only in parts of the Gulf of Mexico.)

Greg Rehmke further adds:

This year I would have purchased some [Apple stock] before Macworld, for the reasons I outline in my earlier article. I think the iLife software fits so well with LCD televisions that the new AppleTV will be popular. I videotaped my nephew's basketball game on Saturday, and we burned a DVD with nifty scene transitions and titles in ten minutes. My sister's family was watching the game an hour later. I think as the level of film clip production develops (above YouTube, but more local or varied than TV and Hollywood), Apple products will be well positioned to encourage creation of content as well as deliver it to big screen TVs. I didn't know much about the iPhone, though that made the big headlines.

Last week, Gabriella Megyesi and I spoke to about 35 homeschoolers near Charlotte, NC (27 students plus some parents). Six or seven of the students had laptops open. Four were white iBooks, two or three were Windows. I read reports that the Macintosh share has risen to 5%, but more important is the age distribution. If Macs have risen much higher among 14-22 year-olds, that would be very interesting.

I think too that as Mac and iPod popularity rises, more people are drawn into the Apple world, and more will watch Macworld for the first time. It is quite a show and will continue to excite investors. The show is streamed on the web beginning at six pm. I don't know how many to watch, but they would enter the market the next day. I think the news from Macworld has a different impact than the jobs' presentation. What other companies get this platform for presenting directly to consumers and investors? It is key to have surprises that have "wow" factors and are newsworthy.

By the way, relating to my oil and housing article, I have bumped into oil people in Wichita and Houston who are busy investing in production of oil drilling equipment in China. I wonder how many (hundreds of) others in various corners of the oil industry have made similar investments. I wonder how much of the world's steel is pouring into the "sure thing" of oil drilling equipment. "Everybody knows" oil is high and will stay high, and oil rigs are out-of-sight expensive. Cheap manufacturing in China is weirdly similar to ethanol plants for farmers. A magic new opportunity to make a killing by pouring capital into the energy industry.


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