Daily Archives: October 9, 2011

Economists fiddle with theory as world burns

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Andy Mukherjee (The Straits Times)
The Asia News Network
Thu, 10/06/2011 10:46 AM

Civility has been one of the less-mourned casualties of this financial crisis.

Radically different viewpoints on what will put the world economy back on a stable growth path have split the profession of economics into two warring tribes.

You are either with Mr Paul Krugman, the Princeton University professor who won the 2008 Nobel Memorial Prize in economic sciences for his seminal work on trade theory, and a few like-minded economists of deep Keynesian persuasion. Or you are their enemy. There is no middle ground.

Most people equate Keynesian thinking with government control of the economy. The more modern variant of the economics profession that seeks its inspiration in Adam Smith’s invisible hand is equated with private enterprise and free markets.

That is a caricature.

The real difference is that Keynesianism, with its roots in the Great Depression of the 1930s, is concerned with the here-and-now of an economy: When Keynesians see a fire, they want to put it out first and ask questions later.

The non-Keynesians believe that the present is inexorably connected with the future, and unless one can permanently change expectations about the future, tinkering with the present makes no sense. Putting out a flame in one corner of a burning building merely brings the blaze back in another.

It is one thing for physical sciences to live with sharp differences in opinion. Whether light is particle or wave was hotly debated for four centuries. But Mr Thomas Edison’s light bulb did not have to wait for that debate to end.

By contrast, economics is a social science that allocates resources between members of a society and between today’s citizens and future generations. In the absence of a theory that justifies why Peter must be robbed to pay Paul, elected politicians have no basis to enact policy.

Say, United States President Barack Obama, desperate to stimulate the economy, faces a choice. He can spend US$1 million to build a road by taxing Mr Warren Buffett, or he can give Mr Buffett a US$1 million tax break. Mr Obama should select the course of action that gives a bigger boost to the economy. But do tax cuts have a bigger multiplier effect than government spending?

Sadly, economists cannot agree. Indeed, prominent economists like Mr John Taylor, who worked in the George W. Bush administration, did not even buy the claim in 2009 by the Obama economics team that a 1 per cent increase in government spending would increase inflation-adjusted US gross domestic product by 1.6 per cent from what it otherwise would be. The effect would be much smaller, he said.

When Mr Obama recently presented a proposal for cutting payroll taxes, Mr Taylor expressed doubts about Moody’s Analytics chief economist Mark Zandi’s claim that it will create 1.9 million jobs.

“This is the same type of model simulation that predicted the very similar 2009 stimulus package would create millions of jobs, and the same type of simulation that claimed that that package worked,” Mr Taylor noted on his blog last month.

Mr Krugman agrees that the Obama stimulus did not do the job. But in his opinion, it was too small to work.

Nowadays, Mr Krugman, who writes an op-ed column in The New York Times, uses his blog to rain punches on anybody who dares to disagree with Keynesian prescriptions for fighting the economic inferno. As the crisis has deepened, the list of his enemies has grown.

Those at the receiving end of his blows include former Fed chairman Paul Volcker, who recently wrote that the US Federal Reserve was sowing the seeds of future inflation. “Volcker, I am sorry to say, is worrying about refighting the 1970s when we are actually refighting the 1930s,” Mr Krugman responded.

In the 1970s, the US experienced economic stagnation along with galloping prices. Mr Volcker raised interest rates all the way to 20 per cent to kill inflation.

The other side – the non-Keynesians – is not taking Mr Krugman’s assault lying down. “Paul isn’t doing his job. He is supposed to read, explain and criticize things economists write, and preferably real professional writing, not interviews, op-eds and blog posts,” said University of Chicago economist John Cochrane.

The US is hurtling towards another recession, Europe is flirting with a sovereign-debt meltdown, China is slowing and the rest of the world is looking to economists to show the way. And here is what Mr Krugman and Mr Kenneth Rogoff, a former chief economist at the International Monetary Fund, were debating around mid-August on the CNN show Fareed Zakaria GPS:

Mr Krugman: “If we discovered space aliens were planning to attack and we needed a massive build-up to counter the space alien threat, and inflation and budget deficits took secondary place to that, this slump would be over in 18 months.”

Mr Rogoff: “And we need Orson Welles, is what you are saying.”

Mr Krugman: No, there was a Twilight Zone episode like this…”

Now, The War Of The Worlds, the radio drama about an alien threat that Welles directed and narrated, spooked Americans by its realism. Equally startling is this war of words between economists. It is turning sillier by the day. The debate is now so caught up with settling scores that men with practical ideas stand no chance of being heard. That is dangerous for policy.

The global economy is seriously ill, and the doctors are debating whether John Maynard Keynes was right to assume that consumption was a function of current income or whether Milton Friedman’s intuition that consumption depends on a consumer’s sense of her “permanent income” is a better theory.

The society at large has to express its disappointment: The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, which is due to be announced on Monday, must be axed. It will not be, but it should.

Anti-intellectualism is an ugly trait. But with their bloodletting, economists have left us with little choice.

Original Article

Natural gas shale play development now going global

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Thirty years ago oilman George Mitchell started an American energy revolution when his company took old techniques and applied them in innovative ways to shale gas fields in north Texas.

Hydraulic fracturing and horizontal drilling were not exactly new, but the combination unlocked tremendous reserves of natural gas in the Barnett Shale and, eventually, similar formations across the U.S. Shale names like the Marcellus, Bakken, Haynesville, Utica and Woodford are now synonymous with game-changing gas reserves.

Some so-called experts feared that we might have to import liquefied natural gas from international producers only a decade ago, but now the American supply is estimated at 100 years or more.

Europe is finally taking notice. The continent has begun exploring its own shale formations in the hopes that some measure of energy independence might be gained.

The goal is not freedom from Middle East and Latin American state-run oil entities, but rather Russian suppliers. European economic and clean-air interests might be linking up about shale even as U.S. regulators are giving the practice a harder look here.

The evidence is cropping up almost everywhere. Halliburton fractured Poland‘s first shale play well last year, while ExxonMobil is exploring concessions in Germany, joining nations such as Spain and the Netherlands in a search for vast stores of natural gas.

U.S. diplomatic channels are willing to help. The State Department formed the Global Shale Gas Initiative last year, “to help countries seeking to utilize their unconventional natural gas resources to identify and develop them safely and economically,” according to the department’s website.

The Global Shale Gas Initiative so far selected countries with some known presence of gas-bearing shale within their borders, market potential and “geopolitical synergies.” The GSGI partnerships include China, India, Jordan and Poland, where reserves are announced at approximately 1.4 trillion cubic meters.

New coal power is difficult to build on due to stringent environmental politics. Some nations, such as Germany, are either running away from or increasingly wary about nuclear power in the wake of the Japanese tsunami disaster.

Eastern European nations, with still fresh memories of Russian domination, want an option to the oil and gas giant perched near their borders. Some, like France, are opposed to hydraulic fracturing although its energy situation is more settled than other neighbors.

But many nations are willing and eager to consider unconventional drilling options, although opinion is divided on whether the European shales have sufficient permeability to recover massive oil and gas. They look across the pond and see potential oceans of energy independence where little existed before the U.S. shale plays shot up.

Original Article

Ghana: Seadrill Inks One-Year Contract for Ultra-Deepwater Newbuild West Leo

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Tullow Oil Ghana Ltd., a subsidiary of Tullow Oil plc has awarded Seadrill a one-year contract for operations offshore Ghana with the newbuild ultra-deepwater semi-submersible rig West Leo.

The potential contract revenue for the one-year period is US$204 million which includes US$18 million in mobilization revenue. In addition, the rig can earn a daily performance bonus of up to 10 percent.

West Leo is currently under construction at Jurong Shipyard in Singapore with delivery scheduled for the end of January 2012. The unit will subsequently start its transit to Ghana where commencement on the Tullow contract is expected in mid April 2012. West Leo will be the second unit of the Moss Maritime CS50 Mk II design that Seadrill puts into operations.

Alf C Thorkildsen, Chief Executive Officer in Seadrill Management AS, says, “We are very pleased to have secured our first deepwater contract with Tullow, a fast growing and dynamic independent oil and gas company. We believe Ghana, which is one of the most promising new deepwater frontiers, may offer significant opportunities for us going forward. We continue to strengthen our revenue backlog and have with this contract secured attractive employment for all our deep and ultra-deepwater units.”

Original Article

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