Friday, 24 October 2008

Taxes and OPEC

"The hardest thing in the world to understand is the income tax."
Albert Einstein

"In this world nothing can be said to be certain, except death and taxes."
Benjamin Franklin

As the world descends into the synchronised Global recession, Keynesian fiscal policies are being used to try and counter market forces. Like pushing on a piece of string, our institutions and leaders will still not admit that we have been living in a bubble, and continue trying to spend money they don't have. Deficit spending has never worked and never will and government intervention has never worked either, but yet this is exactly what we are doing. Governments are increasing their debts, meaning more interest payments are being made to just cover the debt repayments. Money is being poured into overpriced assets such as finance and houses, rather than being spent on infrastructure, hospitals and schools. All this extra debt leads to one thing as time goes on - higher taxes. In my opinion this will happen. With the US presidential election taking place in a matter of days, both candidates are as clueless as each other of how to solve the current problems. Barack Obama is on a mission of change, one of redistributing wealth or to put it bluntly, he seems to be edging towards raising income taxes. In the UK, the pound is sinking and capital is fleeing, with the worst deficits since the Second World War, and coinciding with declining Oil and Gas revenues. The government should be cutting spending at times like these, however this is never a politically popular policy so they borrow. With further borrowing comes further taxation later.

One policy that made the Great Depression so Great, was when Hoover raised income taxes to try and fund the governments deficits. In my opinion we will see this again in the not too distant future. If we take the US for example, they have over $10 trillion of debt on the books, and around $50-$60 trillion of future liabilities, which will more likely increase as time goes on. You can't pay these vast numbers without tax increases, and this will put further strains on Western economies. Ireland and Spain boomed when they joined the EU as they benefited from the generous EU subsidies. Ireland in fact had their first housing boom in their history due to this extra income, but it was all a short term illusion. The Celtic tiger is due for a long decline, with emigration rather than immigration, occurring again. Spain too has issues, reliant on selling foreigners overpriced holiday homes. As air travel becomes more expensive over the years to come there will be further collapse. Italy has huge debts and is in complete denial. With a retirement age of 58, and a lethargic economy it is only being protected by its membership of the Euro. The UK after amounting huge debts, the biggest seen in the west proportionally per head, and with huge external liabilities seems to have run out of time. The plug could be pulled at any moment on any of these. IMF bailout talks have begun. Pakistan, Hungary and Iceland are a few, that have become unwound.

Increasing taxes are the worst thing a government can do during a downturn. This further compounds the problem, taking money out peoples pockets and thus the economy so the government can use it for their own inefficient consumption. If more taxes are implemented then expect very hard times indeed. I feel we have boxed ourselves into this position due to all the waste that has occurred over the previous years and we will have to pay more taxes, and I've been saying this for some time. They will either be taken from income or other indirect forms, or maybe a combination of the two. Governments will look to this to try and re-balance the books, rather than admitting the social system is too extended and cutting spending.

Income tax - Do we need it?

There are some people who feel that we shouldn't need to pay income tax at all. I always find this an interesting concept. Can you imagine getting all your salary with no tax deductions? We used to have no income tax in the UK a long time ago. It was in 1798 when William Pitt introduced income taxes in order to pay for the wars with France. This is essentially how it began. By Governments running up debts that they needed to fund, so turned to the working people to take some of their pay to subsidise their spending. So how could we survive without income taxes? Well we would use our newly untaxed income to pay for stuff ourselves, rather than the government spending our money for us. Schools and hospitals, for example, can function without the need for state systems. The best schools and hospitals are already private institutions. This system would in fact be incredibly efficient despite what people tell you that we need government. Income could be raised by taxing consumption, land etc. The working people who produce wealth for the economy, by expending energy should be the least taxed sector of the economy.

There is a problem with the above. It relies on people making the right decisions and being in control of their own lives. I and many others could manage our own affairs and ensure we had medical insurance and paid for schools etc. However a lot of people can't manage themselves, thus making the wrong decisions and taking the incorrect measures. A lot of people still need to be spoon fed and can not take responsibility for the actions.

OPEC and the Oil Barron's

OPEC have announced that they are going to cut supply and surprise, surprise, the uninformed governments and media have repeated the common mantra that the greedy cartel are responsible for high oil prices and they want the price to remain as high as possible. Nothing could be further from the truth. OPEC are simply trying to keep supply in line with demand and ensure a greater longevity in their oil fields. If they kept forcefully pumping their oil fields the way they have been, oil supplies would collapse within the next decade inducing worldwide collapse and a breakdown of society worse than anyone could imagine. Over pumping a field leads to a steeper decline, the best examples are the Russia's fields which during the eighties the Russians began overproducing them as it was the only way to get hard currency to support the collapsing Communist system. The curve of these fields is a very sharp increase in production, followed by an equally sharp decrease in decline as the field becomes depleted. Contrast that with the fields in Norway that have been well maintained and gradually extracted, the production gradually ramps up and peaks but the decline is gradual and thus the field yields more oil in the long run.

Saudi Arabia the worlds biggest oil producer have already damaged their oil fields, with various technical issues being reported by the Saudi Aramco engineers over time, as early as the sixties and seventies. During the oil spikes in the seventies Saudi Arabia ramped up production to cover the short term shortfall to ensure the west didn't enter a terrible depression, or try and find alternatives. Oil fuels Saudi Arabia's economy along with other OPEC members economies. The last thing they want to do is send the price sky high, thus destroying world economies with economic collapse and destroying their number one export industry. They are simply hinting to the world that this once abundant resource has ceased to be cheep and abundant. It is becoming increasingly hard to extract and more energy is required to get the remaining oil. High hydrocarbon prices are here to stay and countries need to adapt and accept this fact.

It's also amusing when the media mentions that the oil companies are making obscene profits, at the expense of the public. Again its all uninformed dribble, something that has become common in modern journalism (read any of John Pilgers work as he details the decline of journalism, I would personally recommend Heroes as a starting point). For a start oil companies are public listed companies. If they make huge profits profits, compared with other stocks then buy shares in them and reap the dividends. However there is nothing stellar in that aspect and they are like any other tradable company. Profits for big oil companies seem huge, but this is only because they work in huge volumes of the product they sell. Compared with other industries, oil companies actually work on lower margins. Oil company share prices are based more on their oil reserves rather than their profits, as a company without oil has a pretty weak business model, hence the fairly recent fiasco with Shell. The fact that oil is so volatile in price compounds their problem, which brings me onto the next issue of the recent oil price collapse.

This price collapse was to be expected. As with all markets, speculators got involved and drove the price of oil too high and subsequently as oil is bought in 6 month futures contracts these positions were unwound as the delivery date got closer. I predicted to my dad a few months ago that I thought they would fall to around $70-$80 a barrel, with them now around $67 so a tad below. I don't know how low they will fall or when they will begin to rise again, I'll leave that to the technical analysts amongst us. I like to focus on the fundamentals as short term markets behave irrationally, and $67 is cheap. While the public think this is great news, this is in fact setting up a future disaster in the next few years. Future oil projects are being cancelled as the price has collapsed, which means lower oil production for the future which will lead to a greater oil price spike. Projects that were producing, are now being shut down as the oil price has dropped below economic viability recently. It's not like setting up an Internet company. Getting oil projects set up along with the distribution network takes time, years in fact. That's why the looming crisis has the potential to be catastrophic. When it will hit I don't no. If the world collapses then never, but I think the world will go on and continue to grow. The above applies to all commodities. Similar projects are being cancelled as prices drop and projects become less commercially viable. The lack of credit compounds the problem too as money is not available to finance these projects.

I will end with a graph that I found regarding world oil production and projected demand. As can be seen, there's been no substantial increase for the past few years. If the predictions are to be followed as detailed on the graph have a look at how the population demand increases as supply keeps declining. It looks pretty scary 5-10 years from now, just when the next boom should begin. We may be looking at a complete disruption of the business cycle for years to come until we adapt the way we use energy.

No comments:

Post a Comment