Former Shell Oil Chief Predicts Much Higher Oil Prices

The former President of Shell Oil in the United States, John Hofmeister, has predicted significantly higher oil prices in the coming 2 years in a recent interview. Here's the video clip of that interview:

While he talks mainly about the US, there is some relevance for us here in Singapore because we are so dependent on imported oil. Given our growing dependence on tourism to support our over-crowded retail and hospitality sectors, it is not hard to see that higher oil prices will have a serious negative impact on the economy.

Some Thoughts About COE Prices

Some random thoughts about the recent elevated COE prices:

1. Car dealers are partly responsible for the rapid increase in prices, even though reduced future supply has an important role to play. Yet, the same dealers are now asking the government to cut other car taxes so that affordable to not decrease further and discourage more buyers. This is a case of shooting yourself in the foot and then asking the government for help.

2. If the US military is right in its assessment of future world oil supplies, by 2015, there will be a 10 mbpd shortfall relative to demand. In Singapore, this will either mean shortages or very high prices. I suspect that if this scenario plays out, more than a few people will be wondering what they were thinking paying $70K for their COEs.

3. A $70K COE costs more than 1 kg of gold. To me, this is clearly a bubble. People's perception of value is severely distorted.

Fighting inflation

This week, Channel NewsAsia reported that the price of a cup of coffee is expected to increase soon due to the rising cost of coffee beans. Having argued that inflation is heading higher for several years now, this has not been a surprise to me. What caught my attention in the CNA report was this quote:

Coffee drinkers appeared resigned to paying more for their daily cuppa. Insurance agent Dennis Lim might switch from drinking premium coffee at high-end joints to cheaper alternatives if prices go up steeply. "We don't have much choice. We need drinks to go with our food when eating out," said the 40-year-old.

To me, such an attitude is too passive to have in the face of rising inflation. To fight inflation, we need to send signals to the market that there is a limit to our tolerance for higher prices. And we do that by adapting our behaviour as prices rise. For example, using the above case of buying drinks, I know of very well-to-do people who bring a water bottle out during lunch, because they refuse to pay inflated drink prices at coffee-shops.

By adjusting our spending patterns, we can signal to retailers our limits. In turn, this will eventually allow landlords to get the message that they can't keep raising rents. We should start voting with our wallets and stop acting like sheep.

Powering HDB flats with Solar Panels

Channel Newsasia has reported on the success of HDB's solar trial in several housing estates in Singapore, resulting in energy savings. It also reported that the HDB had express hope that the common-area electrical power needs of HDB flats could be 100% covered by solar energy. This is definitely a move in the right direction, despite the fact that the cost of electricity from solar panels is current higher than from natural gas.

With improving efficiency for PV cells, and better conservation, I think it is highly possible that the 100% target can be achieved. The only thing that I think can be done better is perhaps that HDB could hasten to expand the programme to as many areas of Singapore as possible.

Negative Real Interest Rates

A survey of economists of next year's CPI inflation expectations by the Monetary Authority of Singapore showed that inflation is expected to be around 2.9% for 2011. What this means for the typical Singaporean saver is that it could be yet another year of negative real interest rates for his hard-earned savings.

Faced with such a situation, any saver who is serious about protecting his purchasing power will likely be forced to take some risks in having to invest in riskier assets such as bonds, stocks and other asset classes. This also makes saving for retirement more complicated, since CPF interest rates for the Ordinary Account is below the expected rate of CPI inflation.

Also, if home loan rates remain roughly around current levels, the negative real rates may also encourage further price appreciation due to speculation, and this could force the government to come up with another round of measures to cool the property market.

In a negative real interest rate environment, my view is that gold and silver will continue to do well in SGD terms, although likely combined with very high volatility in these 2 markets. As such, it seems possible that next year, just like the current one, savers wanting to protect their purchasing power will have to stomach higher volatility. The faint-hearted are destined to see the value of their hard-earned money erode.

This is most unfortunate. I feel that savers should not be penalised like that. But my opinion on this matter is irrelevant. We just have to be prepared.

A Two-tiered Economy?

I recently came across some very positive comments on the Singapore economy on a popular US financial website. The author of the article (about overseas opportunities for Americans) and a reader commented that the Singapore economy was booming and that there were plenty of business and employment opportunities. The tone was consistent with other reports in the mainstream media, including those concerning higher pay raises and bonuses this year.

In contrast, I have various Singaporean friends who are having difficulties finding work. I also noticed that the licensed money-lender down the corridor from where I am doing a brisk business, with a lot of desperate looking people knocking on its door looking to borrow money.

Looking at the anecdotal evidence, it would appear to me that we now have a two-tier economy. Not everyone is enjoy the fruits of the rapid growth that we have in 2010.

Gold and Silver Very Strong

Gold and silver were showing significant price strength in New York trading on Friday, as can be seen from the 2 Kitco charts below:

This move appears to have negated the Head & Shoulders formation that I had thought might form in the daily gold chart:

This was a costly mistake as I had traded out of a small speculative gold position, and I wasn't quick enough to buy below the 1390 level last night during NY trading. Not too sure whether a short-term top is near though, as the momentum indicators in the chart above are not at oversold levels yet.

On the macroeconomic front, the ECB's backdoor QE programme appears to be winning approval from the stock market, even though it is sign that the EU's debt problems are too serious to be solve with austerity alone. On the US side, the bad unemployment numbers also did not appear to have discouraged the bulls.

To me, this is a very confusing market environment.

China's Bubble Economy

Below is a video about the current state of China's economy, casting doubt on the widely-accepted belief in China's 'economic miracle'. The analysis, in my view, is fairly consistent with the Austrian School's analysis of malinvestments due to excessive credit growth. For those who are familiar with Frédéric Bastiat's 'Broken Window Fallacy', it's also featured prominently in the analysis.