Category: Economics

According to an article in the New York Times today, Shell’s top executive has resigned due to Shell’s overestimation of its oil and gas reserve worldwide. The result of Shell’s reassessment of its reserve was announced several weeks ago and it sent shockwave throughout relevant industries. According to New York Times further, considering the Shell’s conservative management style, it would be hard to accept the gross overestimation, 3.9 billion barrel lower than previously thought. That’s a 20% reduction.

At the same time, due to malpractice suspicion, the Securities and Exchange Commission has launched a probe against Shell on February 19.

The problem was further intensified in the days after the restatement when Shell announced that its net income has decreased by 19% in the fourth quarter earning. The company has also reduced its oil and gas production forecast.
Despite Shell’s restatement, no other major oil and gas firm has issued a restatement apart from El Paso. El Paso reduced its reserve estimate by a staggering 41%.

The current development is interesting since any move made by Shell, one of the once seven sisters will affect the world economy. This is true since the world market to a large degree depends on carbon-based fuel mined by giant transnational companies such as Exxon Mobil, BP and Shell. More importantly, if the current phenomenon in Shell is not exclusively a Shell’s problem, I would expect other firms with similar core business to re-estimate their reserve.

There has been a study that suggests oil and gas reserve will fall rapidly in the near future. In fact, according to another report by New York Times more than a week earlier, Saudi Arabian production is unsustainable and would fall soon. Even right now, Saudi Arabia is barely meeting its own production quota. In Malaysia, PricewaterhouseCoopers has reported that oil and gas reserve is dwindling and further exploration needs to be done if Malaysia wants to combat its rapidly falling reserve.

Also, it has been predicted that by 2050, oil and gas roles in the economy will be limited due to supply shortage. Once oil and gas reserve finally depleted, alternative energy will gain importance.

I’m convinced that the migration from fossil fuel to alternative fuel will happen no matter what; it’s more a matter of when than why or how. Being a green, I’m hoping that it will happen sooner than later because this will force companies such as Shell and the stubborn Exxon Mobil to shift from its traditional core business to alternative energy business.

Due to the imminent migration from fossil fuel to alternative energy business, research on various alternative fuels should be accelerated in order to compensate the spaces left behind by the coming departure of fossil fuel.

With the departure of fossil fuel, perhaps we could combat global warming more effectively since with the absence of fossil fuel, greenhouse gasses emission will be significantly reduced. And even if global warming is not true – of which I believe is impossible to say so – we could have a cleaner air to breath in.

Today in my financial economics class, conducted by a hilarious visiting professor from Vanderbilt University, for the first time there was a hint of politic in it.

It all started with the discussion of investment companies and from there, the topic gradually moved on to pension fund and all the way to social security system. Currently, the social security system is the largest pension fund in the whole world and it is sort similar to the Employees’ Pension Fund back in Malaysia. More precisely, the social security is a defined benefit plan, where the employer is responsibled to set aside part of its employees’ income into a pension fund and then hand out a stream of income for its employees after their retirement. In reality, a small part of the company assets is aside for the purpose, not part of the employees’ income. Therefore, the money that is supposed to be there to pay future retirees is not actually there but rather, will be paid through future wealth that will be put aside when the time to pay up comes.

Currently, the baby boom generation that came into being in the 70s is still in the workforce and the generation is slowly pushing themselves towards retirement. Right now, the social security works because there are more people in the workforce versus people that is out of them workforce due to retirement. And presently, in practice, the baby boomers are paying the income stream for current retirees.

The problem arises when the baby boomers retire. As Professor Rousseau put it in a serious but yet entertaining tone, “And guess who is going to pay for it?”

Well, guess who?

Hint, USD 500 000 000 000 budget deficit; for the mathematically deficient, that’s half a trillion dollar.

Answer, us. Well, actually us excluding me unless I continue to stay here after 2005.

There are a few solutions to this problem. One is to scrap the social security system. Interestingly, the professor said this may not be the solution due to moral hazard – we won’t allow our parents to live in the street. Well, would us?

My opinion on the pegged Ringgit; I’ll break it up into the short run and into the long run.

In the short run, I believe the ringgit should be pegged. Reason is, for the past six months, the USD has consistently been growing weaker against the Euro and the Yen. A weaker real exchange rate will make foreign goods expensive while domestic products cheap. This makes domestic products to be competitive because of its lower price. In a way, it helps to improve the trade balance. While the above effect happens to the USD, the Ringgit is pegged against the US and thus, the same thing affects the Ringgit.

In the long run however, expensive foreign goods will hurt import and certain industries that depend on import. Furthermore, Malaysia is trading with other countries. A pegged Ringgit simply implies pegging the Ringgit against the USD, not against every currency. Though the exchange rate to the USD will stay the same, the same case is not true with the Euro, Japanese Yen, Singaporean Dollar, Aussie Dollar etc. And import come not just from the US. It comes from other part of the world. Ringgit should be floated or risk seeing some industries reduces its size.

Plus, as students in the US, I do not feel the heat of the pegged dollar. After all, the same quantity of Ringgit in almost five years ago is needed to buy the same amount of Dollar today. Yet, imagine the Malaysian students in Japan, Australia – anywhere where the USD is not used for local transaction. Their cost of living increases simply because the exchange rate is falling down. And this increase is sharp. If these students rely on scholarship from Malaysia (from some entities or parents), the cost of transaction due to the real exchange rate is high.

Therefore, if my logic is right and if the USD failed to regain part of its former strength, I believe Ringgit should be floated in the near future. A good trade balance is worthless when local industries suffer. A pegged Ringgit was a good solution in the days immediately after the Asian Financial Crisis, not forever.

Of course, the underlying reason why I support the floatation of Ringgit is the fact that my sister is going to the land of Down Under. I don’t want my parent to be spending too much because of the intangible real exchange rate.

Alan Greenspan declares that he won’t interfere with the declining dollar strength. His refusal to step in is somewhat comprehensible since a weaker dollar will make American made products more competitive – American products will be able to sell at a cheaper price abroad. This however makes foreign products more expensive and thus forcing American import to fall – a sort of an implicit tariff imposed on import. And understandable, this irritates other trading countries, especially the European Union.

Recently, a G7 meeting was held in Roca Raton, Florida and one of the main focuses was the free fall of the dollar against other major currencies, notably the Euro and the Yen. The US refusal to control the dollar rate came under fire but somehow, the US diplomats managed to divert the attention given to them. Instead of criticizing a country sandwiched between the Pacific and the Atlantic, the G7 stared at Japan and other Asian nations. The final statement issued by the G7 was:

Excess volatility and disorderly movements in exchange rates are undesirable for economic growth (AFP, Feb 8)

However, the following statement was stressed:

We emphasize that more flexibility in exchange rates is desirable for major countries or economic areas that lack such flexibility to promote smooth and widespread adjustments in the financial system, based on market conditions (AFP, Feb 8)

The statement, in spite of it was supposed to be directed at the US monetary policy, is simply amazing. I am simply astounded by how the final statement was worded in such a way that it shifts its attention from the issue of volatility to the lack of flexibility.

Despite the seemingly unified statement by members of the G7, the European members are dissatisfied with the statement. Japan has also shrugged off the criticism from the G7 by stressing on G7’s volatility statement. China and South Korea meanwhile agree with Japan. I haven’t heard anything from Malaysia but knowing that the Malaysian ringgit is also being pegged to the dollar like the renminbi, Malaysian central bank, the Bank Negara should be joining their northern colleagues.

On the other side of the fence, some bankers argue that the weakening dollar strength does not matter in the long run. Well, of course it doesn’t matter because, like what John Maynard Keynes had said almost a century ago, in the long run, we are all dead.

p/s – Hah! just received a warning from Michigan’s ITD for not voluntarily using their new transfer protocol. I want my freedom! LOL!