Why forecasting is foolish…part 14098483*

A simple pleasure these days is watching US Financial TV channels as the markets implode. CNBC’s Maria Bartiromo is smarter and prettier than Fox’s Neil Cavuto, but both of them remind of us the kind of people who drove us up the wall in high school: not terribly smart, totally ignorant of the rest of the world, chirpy to the point of distraction and unrelentingly optimistic,although Maria is wavering lately. She may be a closet socialist.

Neil is doubly annoying in that he makes sporadic sense, although it’s probably due to the broken clock twice a day syndrome at his frenetic pace. But then he blows it big time, as he  caters to the Fox demographic, which isn’t aimed at people with money (they watch Bloomberg), but at bitter, disabled veteran types watching him in a bar at the VFW, which may be the only place they can afford.

Yesterday however he had a drop in guest by phone, probably from a yacht cruising offshore: Donald Trump. We mention this in the context of predictions: as we never make any, we can’t in good faith argue with those who make them. Unless of course that someone has as a tenuous grip on reality as the Donald.   

CAVUTO: Now what?

TRUMP: Well, I think there is always a silver lining, and the beautiful silver lining to this is that oil is going to drop down to nothing, it’s about time. And there is nothing OPEC can do about it. And they’re taking tremendous losses like everybody else. And I love the fact that it is almost a cleansing action.

It’s cleaning up — oil got up to a phony price of $150 a barrel, and I think oil could go down to $20 or $25 or lower depending on the severity of the so-called recession, meaning depression. I love the fact that oil dropped, I guess, over $10 a day, and it will continue to drop, and that is the beauty.

So there you have it: Donald Trump predicts oil at $20. Buy pig poo on the windscreen futures while you buy the future on that. 

Great invention we don’t really need, and one we do but don’t have.

What’s easier:

Tracking 60 million or so 50 gram or so, agglomerations of plastic and silicon that constantly move (mobile phones) or

21 million or so, 4 kilo or so, chunks of metal with arcane dials that sit under the stairs (your gas meter).

The phones have it.

Keeping track of your carbon footprint could become as simple as slipping a mobile phone in your pocket: a London-based start-up company has developed software for mobile phones that uses global positioning satellites to work out automatically whether you are walking, driving or flying and then calculate your impact on the environment

We don’t have a pressing need to know this, at least in comparison to something as pedestrian as wanting to know how much gas and electricity (and carbon!) we use and could potentially save.  A personal carbon calculator is a nice to have, but actual carbon use via a meter reading is a must have.  But the hardest is the easiest and the easiest is the hardest.  Go figure.

Why forecasting is foolish…part 14098482*

From Bloomberg Energy:

Deutsche Bank AG slashed its 2009 New York oil price forecast by 23 percent to $92.50 a barrel on concern the financial crisis may curb global economic growth and weaken demand for crude.

“Commodities will be unable to escape the contagion,”

Deutsche analysts Adam Sieminski in Washington and Michael Lewis in London said in a report today. “We expect demand destruction fears into early 2009 will bear down on many commodity prices.”

Just because we happen to share this view even if  we’ve been talking demand destruction in oil, gas and electricity since our first post,  doesn’t mean we don’t  go and check the Deutsche Bank track record, in this case from 18 months and a day ago, when oil was $61 and US gas was $7.:

 We expect oil and natural gas prices to settle lower over the next few years, but not back to the old USD21/bbl and USD3.50/mmBtu mean.

If anyone wants our expertise, we’re open to offers.  We don’t actually make predictions of course, but then again, we know enough both not to make them and not to charge for them.  If only we could get readers to pay us not to say something.

By the way if you don’t like DB’s oil forecast of <$65 from March 2007,  or  $92.50 today September 2008 how about this forecast from as recently as June 2008:

In June, Deutsche Bank chief energy economist Adam Sieminski predicted oil would reach $250 a barrel before the end of 2008.

Too early to tell if that prediction is right!  Still there are another three months to issue some more predictions.


Happy New Year?

The changes happening on Wall Street are nothing compared to the change of heart by Ehud Olmert, Prime Minister of Israel.  Olmert is resigning shortly, but  his words in an exit interview/Jewish New Year message are searingly honest, realistic and completely different to previous views held by the Israeli right who have unfortunately taken much of American Jewry with them.  Earth changing has been over-used lately, but this could be another.  It certainly should deflate a lot of risk premium surrounding Iran in the oil market.  Read the whole interview, this extract is just a taste:

He also dismissed as “megalomania” any thought that Israel would or should attack Iran on its own to stop it from developing nuclear weapons…

What I am saying to you now has not been said by any Israeli leader before me,” Mr. Olmert told Yediot Aharonot newspaper in the interview to mark the Jewish new year that runs from Monday night till Wednesday night. “The time has come to say these things.”

We face the need to decide but are not willing to tell ourselves, yes, this is what we have to do. We have to reach an agreement with the Palestinians, the meaning of which is that in practice we will withdraw from almost all the territories, if not all the territories. We will leave a percentage of these territories in our hands, but will have to give the Palestinians a similar percentage, because without that there will be no peace.”

We’re not Jewish, not that should make any difference, but we can repeat the old expresssion:  From your mouth, to God’s ear. Shalom. Here’s hoping.

Another fine mess…

On the subject of markets, we’re neutral.  Nationalisation of banks doesn’t mean a roll back of energy markets.  But it certainly isn’t pushing them forward either as wee see from the FT:

For some, the retreat of the Washington model risks turning into a rout. David Rothkopf, a senior Commerce department official during the administration of President Bill Clinton, says the world is at a turning point. “This is a watershed,” he says. “This is the end of 25 years of Reagan-Thatcherism, ‘leave it to the market, less government is better government’. That is over – period.”

It will confirm that competition in energy supply has zero impact on price – maybe even BERR and Ofgem will admit it now.  Blaming high UK energy prices on Brussels is another area which will have even less mileage than now:

Germany and France, which spent much of the past two decades being berated by Washington for insufficient flexibility in product, labour and capital markets, have been restrained about displaying public schadenfreude

Can the UK now turn to energy areas where it can do something constructive, like investigating Third Party Introducers and/or mandating Smart Metering for all sometime before the 2030’s and closer to 2012 as in Ireland or California?  Here’s hoping.

Meanwhile, from the Washington Post  insight into what will happen in NY.:

I do have a vengeful streak in me," said Rachelle Pachtman, a public relations consultant who lives in an Upper West Side building heavily populated by some of the rich and privileged financial titans.

"I know that there’s going to be a glut of apartments that are going to be dumped in the multimillion-dollar range," Pachtman said. "They pay a lot for their mortgages. They’ve all got their children in . . . private schools. They all have a lifestyle. How are they going to keep this up?

"It’s going to take their breath away, because they’re going to have to deal with the reality that all the rest of us do," she added. "I think there’s going to be a lot of people on the therapist’s couch — a very typical New York thing. People are going to start drinking a lot."

Douglas Muzzio, a professor of political science at the City University of New York’s Baruch College, agreed that the fall from grace is likely to be hard for the formerly well-heeled.

"This mythology of the swashbuckling capitalist entrepreneur and trader, that may be damaged," he said. "They screwed up. And they’re asking us to pay for their mistakes."

People will start drinking a lot. And every cloud has a silver lining. Not that we have a vengeful streak.

We want to replace paper….

What would it mean for the planetary carbon footprint, and yours to replace paper?

Plastic Logic is working on it, has a prototype and a big new factory in Dresden. The Plastic Logic Reader appears on first look to be a 1/3 the weight of the Mac Book Air, but the company doesn’t want to replace the PC, (and think of the energy implications of that noble cause), they want to replace paper.

The company, whose technology was initially developed at Cambridge University, is focused on doing in plastic what today is typically done in silicon. Why do that, is an obvious question when the chip industry has amassed such expertise in turning silicon wafers into the guts of all sorts of electronics.

The answer, according to Glass, is the relative cheapness of scaling up a plastic display factory versus building a chip-making plant. In the end, making semiconductors from plastic, with its low temperatures and quick production time, could be 40% to 50% cheaper than using silicon

Plastic screens will of course be far more efficient and have minimal impact on ambient temperature than even today’s LCD screens. 

We’ve talked before about the impact of OLED displays: Looks like  Plastic Logic and Universal Display could end up being the VHS v Betamax battle for 21st century energy efficient self-refreshing display technology.  Who’ll win?  Maybe not either one, but every one else will. Hope you will be reading NHO on one soon.

No shortage of gullibility

A handy rule of thumb in life and the markets is to ask oneself: why is this guy telling me this? Compare who predicts electricity shortages this winter and those who don’t.

The energy trader Inenco says the UK could face power blackouts "within weeks" if a sudden cold snap or unplanned power outage occurs.
….David Hunter, from energy consultants McKinnon and Clarke, told the BBC there was "real concern" that there could "a lack of enough power available for short periods".
"What’s definitely true is that margins are tighter than they’ve been for a long time and not very much has to go wrong to turn that towards brownouts or blackouts," he said.

If the market is talked up, prices will go up. We can’t speak for the above companies, but many consultant’s revenue depends on a percentage of spend fee from either energy suppliers or end-users. And, much more often than one might think, both. High fear, high price, high fee. Buy on reality, i.e. an index price that is based on actual use in November, not scare stories. But even though that is the best overall option for end-users, third party introducers rarely present it to them. No end-user will pay, or at least for very long, a third party to tell them to take no action.

NHO is different from consultants in two ways.  One: we never, ever say that we know what will happen in the energy markets. We’re not psychic. Two: no one crosses our palm with silver either. Apart from us,  you can listen, for free, to the other side of the argument:

"It is nonsense to suggest that the UK is at high risk of blackouts," said a spokesman for the National Grid.

…..Goran Strbac, Professor of Electrical Energy Systems, at Imperial College London, said that blackouts are no more likely this winter than in any previous year.
"Where is the panic? I don’t see any reason….."I don’t see any reason to doubt the National Grid’s forecasts. They have no incentive to hide any potential shortages. In the past, they have often advertised them."

Allan Asher, chief executive of consumer watchdog Energywatch, told the BBC there were several periods this winter when "it’s going to be very tight"…. but said: "I just don’t think it’s wise to alarm people about this.

"Both at a regulatory and planning level a huge amount needs to be done, but that shouldn’t be done with dire threats which overstate the concern now

But as we at No Hot Air know only too well, sell a disaster story and people line up. Sell a story of business as usual,and people yawn. 

What we need is realism. Pessimists are never, ever disappointed; sometimes they even get pleasant surprises. We prefer to be optimists but are actually realists. Sure sometimes we’ll be wrong. Isn’t everyone?  But whatever happens, we don’t tailor reality according to cash flow.

American Exceptionalism

What does American politics have to do with your energy price?   Quite a bit actually. 

Number one: oil.  Here in Britain we’re going to pay the price for slavishly hitching up to the Bush wagon for all those years.  Unfortunately in British politics it’s far easier to paint EU bureaucrats as foreign banana straighteners out to destroy our way life, when actually our way of life is being destroyed by incompetent US trained management consultants: this isn’t a case of the right hand not knowing what the left hand is doing – the right hand doesn’t know what it is doing. 

Oil will rise as the dollar follows America’s global influence south.The pound will benefit slightly from having trade in Euros, but not as much as it could have had if we were smart enough to  have joined it in the first place.

The U.S. dollar is likely to retain its lead role in the world economy but other currencies will gain in importance, German Finance Minister Peer Steinbrueck said on Thursday.

There would be four major currencies in the future, Steinbrueck said, naming the dollar, yen, euro and yuan

Notice how the pound was not mentioned. Save the pound, kill your economy and end up losing your independence anyway.

Meanwhile the US election is getting stranger by the day.  How can anyone take this country seriously?!

Only by listening to smart, funny people like Garrison Keillor and hoping they win over the huge amount of Americans who live in a 21st century technological paradise they think started 6000 years ago shortly after a conversation with a snake.

McCain seems willing to say anything, do anything, to get to the White House so he can go to war with Iran. If he needs to recline naked in a department store window, he would do that, or eat live chickens, or claim to be a reformer. Obviously you can fool a lot of people for a while and maybe he can stretch it out until mid-November. But the truth is marching on. A few true conservatives are leading a charge against the bailout. Good for them. But how about admitting that their cowboy economic philosophy was at fault here?

It’s times like this we should remember Adlai Stevenson, Democratic candidate in 1952 and 1956.  When told he had the thinking people of America behind him, he replied "Yes, but I need a majority".  He lost. Twice.

The slide toward October

We say that buying energy on a fixed price contract is the energy equivalent of a psychic reading and that as Keynes said the only firm prediction is that in the long term we’ll all be dead.

Buying a fixed price means predicting energy prices six months or more in the future. The idea is preposterous, as recent activity in other markets shows us. Given that, it’s worth noting the inexorable slide of October 2008 gas as the month approaches.

A basic rule of commodity markets is that spot prices naturally fall as day or month of delivery approaches. Before then, curve prices reflect uncertainty or risk. Spot prices, especially in energy are based on reality of supply and demand. Curve drivers include forward oil prices, which are inherently unrealistic or drivers common to any market: fear, mis-information, panic, avarice and magical thinking in general, in the form of unbridled optimism or unwarranted negativity.

The price of October gas is a key driver for how the rest of the winter may pan out, and we now see October falling 14% from it’s July peak, 83.13 pence per them to 71.26 today.  But the disconnect between near future prices and the curve is underlined in comparing one year fixed prices. One year fixed from October is still only 6.4% lower than in July.  The key month of January is only 4% lower.

Gas commodity prices for a one year price from August 1 2008 would have been 95 pence per therm.  That one year fix would have been 162% higher than the 37 pence in 2007. 

It seems to us that fixing a 160% increase, to avoid a "risk" that energy prices would go higher, is akin to corpses buying insurance.

We have no idea of what’s going to happen tomorrow, apart from a strong likelihood, but no guarantee, that the sun will come up. But we can look in the rear view mirror and say that a month ahead index would have been 31% cheaper in August 41% in September and 25% (so far) for October than fixed. 

The luck won’t hold out all the time: there will be surprises and some months will be over the fixed benchmark – or perhaps not.  Or perhaps not enough that they would wipe out the August through October savigns already in the bank.

Who knows?  Not us.  Who can you pay to predict the future?  Not us.