As part of the “Arab Spring,” the Libyan uprising against the government of Moammar Gadhafi was supposed to be over in only a few weeks, especially after NATO forces used airpower to enforce a no fly zone over the country. It is now almost summer, and there are very few signs of the regime folding its tents and going away. Instead, it now begins to look like NATO is supporting one side in what is shaping up as a civil war between the western and eastern halves of the country.
Of course, NATO’s military involvement has been about much more than just grounding the Libyan air force, right from the get go. Under the guise of a humanitarian mission, NATO aircraft (mostly from France and Britain) have been striking at Gadhafi’s military whenever targets present themselves. However, the fighter aircraft deployed are not the most effective weapon to use for close air support of the rebellion’s ground forces. It is hard to hit scattered artillery pieces when you are moving 500 miles an hour at a height of 2000 feet, even with precision guided munitions. So this week France announced that a force of attack helicopters would be sent to Libya to support the rebellion.
But it would only be twelve choppers. That’s not much of an investment, is it?
Well, not so fast. The twelve helicopters and their crews represent NATO’s fist. But it takes a lot of muscle to drive that fist. First of all, they have to be refueled after every mission, so you need fuel handlers and fuel storage. Second, when the choppers break, you’ve got to fix them, so you need a complement of aircraft mechanics and avionics technicians at the air base. On hot missions you fire off weapons, so you need ordinance personnel to store ammo and reload the guns. And because you need to house and feed all these guys, military units almost always carry their own logistical capability with them when they deploy.
Bottom line, when the politicians talk about sending twelve helicopters, they are really talking about sending a whole unit, a squadron. This means that the French will have about 250 of their airmen involved in the conflict. Once they are on the ground, they become legitimate military targets for Gadhafi’s forces. How much do you want to bet that as soon as the squadron commander sees the half trained militia providing security for his unit, he’ll start lobbying for more troops to protect his air base?
NATO is escalating its forces in Libya. From a US perspective, the only good thing about the situation is that the Obama administration has pushed this mess off onto the Europeans. Because once you start escalation, each incremental step gets easier and easier. And we still have our hands full in Iraq and Afghanistan.
Thursday, May 26, 2011
Tuesday, May 17, 2011
High Gas Prices: Who's to Blame?
I spent over $65 filling up the gas tank of my car the other day. Six months ago that would have cost me less than $50. Gasoline prices have shot up over the past year, and are well over $4.00 a gallon in many parts of the country.
The rapid rise in prices is putting a squeeze on many household budgets. Inevitably, people tend to hate on the big oil companies, blaming them for the increase in energy costs. And those companies are reporting high profits. Rather than blaming the oil companies for high prices, however, we need to look deeper to understand what is driving the costs of a barrel of oil upward. After all, when oil prices drop, so do gasoline prices. Not always as fast a drop as when they go up in lockstep with cost increases, but if oil prices were to fall substantially, gas prices would eventually follow.
The first of the forces pushing upwards on the cost of oil is the Federal Reserve’s program of Quantitative Easing. In order to try and stimulate the economy, the Fed has been printing money and putting it in circulation. $600 billion on this round, and this is QE II. The theory is that flooding the economy with money will jumpstart spending, because people will have more cash to spend.
Another term for quantitative easing is devaluing the currency, but that would be politically incorrect to say, so no one in Washington is using that term. Devaluation does help expand exports, so in that sense it does stimulate the economy. But it also makes imports more expensive. As the dollar becomes worth less, because there are more of them around, commodities that trade on global markets, like oil or gold or cotton, go up in dollar terms. Printing money is a big chunk of why gas prices ascended to the stratosphere in the last six months or so. But it’s not the whole story.
The other piece of the puzzle to higher gas prices is financial speculation. There is a very active market in oil and gas futures. These are contracts where you can lock in a price for future deliveries of oil at a specified price. If you don’t need to take delivery of the oil, you can resell the contract and pocket a gain or loss, depending on what direction oil prices have moved since the original contract was purchased.
There are bona fide purchasers of oil futures, companies like airlines and large trucking companies. These guys like the stability of knowing what their fuel costs are going to be six months down the road. There are also speculators trading in contracts for profit. They never intend to take delivery of the oil, but merely to resell the contract. Traders perform an important market function. They provide the liquidity that makes the market function.
But when speculative trading outweighs bona fide purchases, then the market is driven by speculation, and not the underlying fundamentals of supply and demand for the actual commodity being traded. Fueled by borrowed money, Wall Street hedge funds are now buying and selling more oil contracts then bona fide oil users.
We are seeing straightforward momentum investing driving oil prices these days. Rising oil prices make futures contracts more valuable. Other investors see the profits, and leap into the market as well, driving the price higher. The higher prices make the new contracts profitable, pulling more money into the market. The result is a price spiral that continues as long as money pours into the market, and with borrowed funds, money can pour in for a long time.
The villains at the gas pump are not the oil companies. It is a combination of government debasing the coinage, and Wall Street speculation that is pushing up prices at the pump.
In the face of large impersonal forces beyond my control, I’m not shaking my fist and cursing at the oil companies, or even at the hedge funds running the game. I’m trading in my gas hog for a small car that gets better milage.
The rapid rise in prices is putting a squeeze on many household budgets. Inevitably, people tend to hate on the big oil companies, blaming them for the increase in energy costs. And those companies are reporting high profits. Rather than blaming the oil companies for high prices, however, we need to look deeper to understand what is driving the costs of a barrel of oil upward. After all, when oil prices drop, so do gasoline prices. Not always as fast a drop as when they go up in lockstep with cost increases, but if oil prices were to fall substantially, gas prices would eventually follow.
The first of the forces pushing upwards on the cost of oil is the Federal Reserve’s program of Quantitative Easing. In order to try and stimulate the economy, the Fed has been printing money and putting it in circulation. $600 billion on this round, and this is QE II. The theory is that flooding the economy with money will jumpstart spending, because people will have more cash to spend.
Another term for quantitative easing is devaluing the currency, but that would be politically incorrect to say, so no one in Washington is using that term. Devaluation does help expand exports, so in that sense it does stimulate the economy. But it also makes imports more expensive. As the dollar becomes worth less, because there are more of them around, commodities that trade on global markets, like oil or gold or cotton, go up in dollar terms. Printing money is a big chunk of why gas prices ascended to the stratosphere in the last six months or so. But it’s not the whole story.
The other piece of the puzzle to higher gas prices is financial speculation. There is a very active market in oil and gas futures. These are contracts where you can lock in a price for future deliveries of oil at a specified price. If you don’t need to take delivery of the oil, you can resell the contract and pocket a gain or loss, depending on what direction oil prices have moved since the original contract was purchased.
There are bona fide purchasers of oil futures, companies like airlines and large trucking companies. These guys like the stability of knowing what their fuel costs are going to be six months down the road. There are also speculators trading in contracts for profit. They never intend to take delivery of the oil, but merely to resell the contract. Traders perform an important market function. They provide the liquidity that makes the market function.
But when speculative trading outweighs bona fide purchases, then the market is driven by speculation, and not the underlying fundamentals of supply and demand for the actual commodity being traded. Fueled by borrowed money, Wall Street hedge funds are now buying and selling more oil contracts then bona fide oil users.
We are seeing straightforward momentum investing driving oil prices these days. Rising oil prices make futures contracts more valuable. Other investors see the profits, and leap into the market as well, driving the price higher. The higher prices make the new contracts profitable, pulling more money into the market. The result is a price spiral that continues as long as money pours into the market, and with borrowed funds, money can pour in for a long time.
The villains at the gas pump are not the oil companies. It is a combination of government debasing the coinage, and Wall Street speculation that is pushing up prices at the pump.
In the face of large impersonal forces beyond my control, I’m not shaking my fist and cursing at the oil companies, or even at the hedge funds running the game. I’m trading in my gas hog for a small car that gets better milage.
Wednesday, May 11, 2011
Raising Taxes on Oil Companies
All the signs of spring are here. The grass has started growing again, the birds are singing, and the sap has started rising in Washington.
As a response to high gasoline prices, legislation has been proposed to increase taxes on the five largest oil companies. It is being billed as the removal of tax breaks, which strikes me as terribly disingenuous. If you are raising revenue, that is a tax increase.
The news reports I have read are short on details about what specific subsidies are being changed or lifted. Apparently some of the provisions under review have been part of the tax code since the 1920’s.
The biggest piece of the puzzle, however, is undoing a change to the tax code that was made in 2005. This change lowered the maximum income tax rate from 35% to 32% for companies in certain manufacturing industries. The proposed legislation raises the income tax rate for these five companies from the current 32% to 35%. This tax increase provides $18 billion of the total $21 billion increased tax revenue of the whole package.
First off, when the government changes your tax rate from 32% to 35%, that’s not eliminating a subsidy, that is a tax increase. The next point of contention I have with this is why single out the oil and gas industry? Why not increase taxes on the car companies, or paper products manufacturers? And then there is the question of what makes these five companies so special? That proviso has Supreme Court challenge written all over it.
The most amazing thing about this proposed legislation, however, is that it will do nothing to reduce gas prices. High gas prices are what made these companies a target in the first place.
So let’s take a concern of the citizenry, use that as an excuse to raise taxes by scapegoating the largest players in an industry. Ignore the reality that what you propose is probably unconstitutional. Sell it by claiming you are eliminating subsidies, instead of calling it an increase. And finally, the actions you propose will do nothing to address the original concern of the citizens. That’s our Congress for you!
There are times when I despair for the future of the republic.
As a response to high gasoline prices, legislation has been proposed to increase taxes on the five largest oil companies. It is being billed as the removal of tax breaks, which strikes me as terribly disingenuous. If you are raising revenue, that is a tax increase.
The news reports I have read are short on details about what specific subsidies are being changed or lifted. Apparently some of the provisions under review have been part of the tax code since the 1920’s.
The biggest piece of the puzzle, however, is undoing a change to the tax code that was made in 2005. This change lowered the maximum income tax rate from 35% to 32% for companies in certain manufacturing industries. The proposed legislation raises the income tax rate for these five companies from the current 32% to 35%. This tax increase provides $18 billion of the total $21 billion increased tax revenue of the whole package.
First off, when the government changes your tax rate from 32% to 35%, that’s not eliminating a subsidy, that is a tax increase. The next point of contention I have with this is why single out the oil and gas industry? Why not increase taxes on the car companies, or paper products manufacturers? And then there is the question of what makes these five companies so special? That proviso has Supreme Court challenge written all over it.
The most amazing thing about this proposed legislation, however, is that it will do nothing to reduce gas prices. High gas prices are what made these companies a target in the first place.
So let’s take a concern of the citizenry, use that as an excuse to raise taxes by scapegoating the largest players in an industry. Ignore the reality that what you propose is probably unconstitutional. Sell it by claiming you are eliminating subsidies, instead of calling it an increase. And finally, the actions you propose will do nothing to address the original concern of the citizens. That’s our Congress for you!
There are times when I despair for the future of the republic.
Tuesday, May 3, 2011
Osama Bin Laden Sleeps with the Fishes
Well, it took ten years, but justice finally caught up with Osama Bin Laden. Chalk one up for the good guys.
I’m intrigued by what appears to be unseemly haste in disposing of the carcass. I understand the desire to appear responsive to the Islamic world’s sensibilities, but it was less than twelve hours after the news broke that the first deniers and conspiracy theorists began making pronouncements that the whole incident had been faked. I would have dumped the body in a freezer until an independent authority could verify the identification process. Then weight the corpse and deep six it.
For me, the revelation that Bin Laden wasn’t hiding out in a cave is the most fascinating and disturbing part of the whole story. Abbottabad is only forty miles outside of Islamabad, the capital of Pakistan. One of the interesting wrinkles is that the entire operation was a massive violation of Pakistani territorial sovereignty. This was not a drone missile strike in the tribal areas along the border with Afghanistan, where the central government’s control is honored more in the breach than the observance. We flew multiple helicopters deep inside Pakistan for a smash and grab operation. I would like to see more reporting on the Pakistan reaction to our unilateral military action inside their borders.
The big news is that it really calls our Afghanistan strategy into question. We invaded Afghanistan nine years ago for two purposes: bring Bin Laden to justice, and prevent al Qaeda from using the country as a staging ground for terrorist attacks on the US. It now turns out that for the last few years, all of our efforts in Afghanistan seem to have been wasted in advancing those goals. Bin Laden wasn’t in Afghanistan to find, and the locus of terrorist planning has shifted to other countries, such as Yemen.
We are involved in a hugely expensive exercise in state building in Afghanistan, working at the end of extremely long supply lines, and after nine years we have little to show for our efforts to build up Afghan institutions. If we stopped propping up the Karzai government with both money and troops, I have little doubt it would collapse like a house of cards. We may be accomplishing small incremental gains in nation building over there, but from what I read, there is nothing like self sustaining development occurring in Afghanistan.
We have achieved our war aims in Afghanistan. It is time to declare victory and go home.
I’m intrigued by what appears to be unseemly haste in disposing of the carcass. I understand the desire to appear responsive to the Islamic world’s sensibilities, but it was less than twelve hours after the news broke that the first deniers and conspiracy theorists began making pronouncements that the whole incident had been faked. I would have dumped the body in a freezer until an independent authority could verify the identification process. Then weight the corpse and deep six it.
For me, the revelation that Bin Laden wasn’t hiding out in a cave is the most fascinating and disturbing part of the whole story. Abbottabad is only forty miles outside of Islamabad, the capital of Pakistan. One of the interesting wrinkles is that the entire operation was a massive violation of Pakistani territorial sovereignty. This was not a drone missile strike in the tribal areas along the border with Afghanistan, where the central government’s control is honored more in the breach than the observance. We flew multiple helicopters deep inside Pakistan for a smash and grab operation. I would like to see more reporting on the Pakistan reaction to our unilateral military action inside their borders.
The big news is that it really calls our Afghanistan strategy into question. We invaded Afghanistan nine years ago for two purposes: bring Bin Laden to justice, and prevent al Qaeda from using the country as a staging ground for terrorist attacks on the US. It now turns out that for the last few years, all of our efforts in Afghanistan seem to have been wasted in advancing those goals. Bin Laden wasn’t in Afghanistan to find, and the locus of terrorist planning has shifted to other countries, such as Yemen.
We are involved in a hugely expensive exercise in state building in Afghanistan, working at the end of extremely long supply lines, and after nine years we have little to show for our efforts to build up Afghan institutions. If we stopped propping up the Karzai government with both money and troops, I have little doubt it would collapse like a house of cards. We may be accomplishing small incremental gains in nation building over there, but from what I read, there is nothing like self sustaining development occurring in Afghanistan.
We have achieved our war aims in Afghanistan. It is time to declare victory and go home.
Subscribe to:
Posts (Atom)