Fragiler-than-it-seems-Brazil, continued

I've worried before about whether Brazil's economic and political progress would falter if commodity prices swooned. Via MR, this FT article not only puts a number on that...

Plug in 2005 commodity prices, for example, and Brazil’s $23bn trade surplus would become a $20bn deficit.

... it also calls out another worrisome trend, the explosion of consumer leverage.

Bank credit is now growing at a 20 per cent annual clip.

That has given Brazil’s economy an appearance of strength, but also risked stretching it thin. Typically, Brazilians now spend a quarter of disposable income on debt payments. At the height of the US credit boom, by contrast, American households spent about 15 per cent.

With the real now at 1.57 vs. the dollar - higher than it ever got in 2008 - I am pondering whether now is the time to trim my Brazil investment exposure...

The line between trading and manipulation

Ah, the publicity that comes from an IPO...

This is OK and unsurprising...

Glencore made a speculative bet on rising wheat and corn prices in the early stages of last summer’s Russian drought, the world’s largest commodity trader has revealed ahead of its initial public offering that will value the company at $60bn.

... but this is pretty sketchy:

As it bet on rising prices, senior traders at the Swiss-based company publicly urged Russia to impose a grain export ban... On August 3, Yury Ognev, head of Glencore’s Russian grain unit, encouraged Moscow to ban wheat exports, saying: “From our point of view the government has all the reasons to stop all exports.” His deputy made similar comments. At the time Glencore distanced itself from the comments, saying they represented Mr Ognev’s personal views. Russia imposed the ban on August 5, sending the price of the cereal more than 15 per cent higher in two days.

As longtime readers know, I generally believe and document that speculation in commodity markets does more good than ill, but this type of lobbying for trade-reducing, volatility and uncertainty-enhancing measures makes me very uncomfortable, and will never be popular.

Resource primacy in African foreign investment

Interesting graphic on FDI in Africa from Afrographique (larger version at link):

Via Rachel Strohm, with the punch line:

Investment levels seem strongly correlated with natural resources (no surprise there), but don’t appear to have much relation to the ease of doing business in a country. Nigeria, Sudan, Angola, and the Republic of Congo are all major oil exporters, even though of the 46 African countries the World Bank included in its 2011 Doing Business rankings*, they were respectively rated #17, 25, 31 and 40. Chad, at #46, had more investment than Botswana at #3. And Somalia, a failed state that didn’t even make it into the Doing Business rankings, had only a touch less investment than vaunted reformer Rwanda. Fascinating stuff.

Could U.S.-Brazil relations watershed survive commodity crash?

A very high percentage of "Event X was a true watershed" articles turn out to be crap, but this one on U.S.-Brazil relations (via MR) is pretty good. (Maybe because that narrative device is totally extraneous - this change has been coming for years and Obama's visit didn't actually change that much). Worth reading in full, but the punch line is:

... the major strategic interests of the US and Brazil are so closely aligned that cooperation between the two countries will be one of the building blocks of the new century... [Brazil’s] its instinct for “order and progress” (the slogan appears on its flag) dovetails very closely with what the United States wants to see in the world.

I agree except for a nagging doubt - with Brazil's economic ascendancy so dependent on commodities, how much of this unravels if resource scarcity isn't all it's cracked up to be and prices crash? After all, we've heard the same arguments before (ahem Paul Ehrlich).

Let me back up a bit to build up the logic. Brazil has historically been commodity-dependent...

In the 19th century Brazil was part of Britain’s ‘informal empire’; Britain was the dominant foreign investor in the country and Britain controlled the markets for the primary commodities (sugar, rubber, cotton, coffee) whose falling and rising prices set the tempo for Brazil’s growth. But the system seemed rigged in Britain’s favor; Brazil could never escape its role as a commodity producer — a hewer of wood and a drawer of water in the international community. Brazil did the backbreaking labor; Britain grew rich.

... but isn't it still? I don't have the stats on hand about how much soy, iron ore, etc. etc. Brazil exports, but it's a lot; it's not clear to me that the economy has fundamentally transformed, rather than simply ridden the latest commodity wave on the way up.

The premise continues that Brazil has demonstrated a successful new model...

Lula’s Brazil stuck up for Venezuela at international gatherings and danced with it at parties. But all the while, Lula’s Brazil was destroying the political logic of the Bolivareans by demonstrating that a pluralistic democracy integrated into the global market can do more for the poor than incompetent populist blowhards. Chavez talked; Lula delivered

(again, on the back of a commodity boom...)

What that means is that Brazilians, even those on the left like former president Lula, are now less inclined to think that Brazil needs to overturn the global economic system.

I have lived in Brazil and I agree with this sentiment, and that "Brazilians have an immense capacity for hard and focused work." But in a world with lower commodity prices (and, again, I don't think this is the most likely scenario, but remember it's been less than 30 months since crude oil was in the low $30s), how will the Brazilian economy hold up, and if it falters, won't that popular support as well?

This is very much a preliminary perspective and I would welcome debate and pushback on it.

Ethanol fact(?) of the day

I hadn't heard this before, but a colleague told me today that 2/3 of the corn that goes into ethanol comes out in a form that can be used as animal feed (probably DDGS). If that's true, if we use 30% of our corn crop for ethanol it's more like 10% out of the food system, etc.

Issues with Howarth paper

Open season has opened on Robert Howarth's paper claiming that shale gas emits more GHGs than burning coal; I like CFR's Michael Levi's take:

Howarth’s basic question is an important one: what happens to the claimed emissions benefits of natural gas once you include the methane leaked in its production and transport? Alas, his analysis is based on extremely weak data, and also has a severe methodological flaw (plus some other questionable decisions), all of which means that his bottom line conclusions shouldn’t carry weight. But someone else, with better data and more careful calculations, ought to address this important set of questions that he raises properly.

He cites four main issues; the first three are:

First, the data for leakage from well completions and pipelines, which is where he’s finding most of his methane leaks, is really bad.

Second, Howarth’s gas-to-coal comparisons are all done on a per energy unit basis... Here’s the thing: modern gas power generation technology is a lot more efficient than modern coal generation, so a gigajoule of gas produces a lot more electricity than a gigajoule of coal. The per kWh comparison is the correct one, but Howarth doesn’t do it. This is an unforgivable methodological flaw; correcting for it strongly tilts Howarth’s calculations back toward gas, even if you accept everything else he says.

Third, the problems with gas that Howarth flags have cheap technological fixes (green well completion techniques, better pipeline care), though there may be institutional barriers to implementing them. If we scale up gas and realize we have an emissions problem, there are things we can do. The only technological fix for coal, in contrast, is CCS, which isn’t commercial yet; if we decide we want to fix our coal problem, it’s not clear we have any options.

The fourth is around the time horizon used - a 20-year horizon makes methane look worse than a 100-year horizon, because it decays much faster than CO2. This one is really more of a judgment call than a serious flaw in the paper (at least it is transparent). But well said, Michael Levi - you've earned your RSS feed entry into my closely guarded Google Reader.

What crop supply response looks like

Stealing the link and title wholesale from Michael Roberts:

When prices for corn and soybeans surged last fall, Bill Hammitt, a farmer in the fertile hill country of western Iowa, began to see the bulldozers come out, clearing steep hillsides of trees and pastureland to make way for more acres of the state’s staple crops. Now, as spring planting begins, with the chance of drenching rains, Mr. Hammitt worries that such steep ground is at high risk for soil erosion — a farmland scourge that feels as distant to most Americans as tales of the Dust Bowl and Woody Guthrie ballads.

Study says fracking emits GHGs

More ammunition for those who oppose the recent explosion of shale gas exploration and production (e.g. local environmentalists, coal companies):

Cornell University professors will soon publish research that concludes natural gas produced with a drilling method called “hydraulic fracturing” contributes to global warming as much as coal, or even more.

The study concludes that shale gas developed through fracking carries a higher greenhouse gas footprint because the “fugitive” methane emissions at the fracking sites are greater than releases from conventional gas wells.

I'm not really in a position to evaluate the credibility of the study, although one might read into the fact that industry groups are pushing back on the study's assumptions about the GHG potency of methane (the range is fairly well-established), whereas I would have thought that the quality of measurement of "fugitive methane emissions" would have been much more suspect.

Commodity dependence of Brazil

The Globalizer, via MR:

When Lula won the presidency in 2002, Brazil’s main trading partners were the United States (25.5%), the Netherlands (5.3%), Germany (4.2%) and China (4.2%).

Over the eight years, the U.S. share collapsed, while the Chinese share more than tripled. By 2009, Brazil’s main trading partners were China (13.2%), the United States (9.6%), Argentina (7.8%) and the Netherlands (5.0%).

The writing was on the wall. As long as demand in these two nations continued for commodities, Brazil will continue to grow — but if demand were to fall abruptly, the situation could get difficult.

Brazil is currently a darling of economic and political progress, but lots (most? >100%?) of the underlying growth has been driven by commodity exports, and that story has ended badly before.

This article on Lula, also via MR, is also worth reading - it starts:

... in democratic conditions, to be more popular at the close than at the outset of a prolonged period in office is rare. Rarer still – indeed, virtually unheard of – is for such popularity to reflect, not appeasement or moderation, but a radicalisation in government. Today, there is only one ruler in the world who can claim this achievement, the former worker who in January stepped down as president of Brazil, enjoying the approval of 80 per cent of its citizens. By any criterion, Luiz Inácio da Silva is the most successful politician of his time.

Cute analogy

Aluminum is to energy as grain is to water.

(Half courtesy of Laurence Smith's The World in 2050, via MR, and half courtesy of a conversation with a colleague.)

Saudi budget breakeven now >$100/bbl

Via The Oil and the Glory (which I've started to read, but really needs to get an RSS feed, because my tolerance for random e-mails that disrupt my carefully metered information diet is limited), the Institute of International Finance has calculated that after taking into account the $130 billion in "largesse" that Saudi King Abdullah has announced to preempt potential unrest, the oil price at which the Saudi budget breaks even has risen from $68 to $88/bbl. That is a scarily high number, and I don't know to what extent that factors in the volume volatility that comes from being OPEC's (and the world's) swing producer. There is clearly embedded risk and uncertainty, even to that threshold.

Current U.S. nuclear waste storage strategy

Speaking of strategies to store nuclear waste, here's an article on the current de facto U.S. government strategy: compensate nuclear operators for storing onsite, and double the expense by continually pursuing doomed litigation to avoid these payments. I think in a perfect world we could probably figure out something better.