Business Blog: Hoover’s Business Insight Zone

As I write this, oil is trading at an eye-popping $123.39 per barrel on the NYMEX futures board. Part of the high price of oil stems from the low value of the dollar relative to other currencies — especially the euro — so the other day I pulled together some figures to see how much cheaper oil would be if it were priced in euros instead of dollars.

Inputs:

• Price of oil in dollars, taken from the Energy Information Administration of the US Department of Energy.
• Exchange rate, dollars to euros, taken from Exchange-Rates.org.

Timeframe:

• 5 November 2007 through 29 April 2008 (i.e. Tuesday of last week).

Results (greenbacks in green, euros in blue):

My simple-Simon conclusions:

• The exchange-rate divergence has meant more and more over the past couple of months.
• Even when priced in euros, oil is still plenty expensive.

Other items potentially of interest in this vein:

• Statistics Matter: Oil, Dollars, Euros & Gold — This one includes a chart scanned from the Wall Street Journal earlier this year.
• Crude Oil Prices, Dollars vs. Euros: Is There a Difference? – I used this post’s sources in formulating my own chart.
• U.S. gas: So cheap it hurts: “Relatively low taxes have kept pump prices far below most other developed nations, which some say is precisely why the current runup is so painful.” — This article explains why “the U.S. is actually one of the cheaper places to fill up in the world” and digs into the effect of government policy on gasoline prices.

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If you care at all about relations between the United States and China — and in my book, you should — do yourself a favor and read anything James Fallows writes on the subject in The Atlantic Monthly. Fallows has been living in China for the past couple of years, filing story after story on the commercial, economic, and political realities at work in the world’s most populous country.

Particularly interesting is this article from the beginning of this year, in which he discusses the strange financial relationship that prevails between the two powers:

The $1.4 Trillion Question

The whole thing is worth a read, but here’s the nut graf:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus—$1.4 trillion and counting, going up by about $1 billion per day—that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends—suddenly versus gradually, for predictable reasons versus during a panic—will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

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That’s the takeaway message from the WSJ Energy Roundup item quoted below, which discusses Lafarge’s $12.9 billion deal to buy the cement operations of Orascom Construction Industries.

For a while I covered the Egyptian beat for Hoover’s, and became fascinated with the Sawiris family that controls Orascom. (Naguib Sawiris, who runs Orascom Telecom, is particularly interesting.) I’m also intrigued by any deal that merges environmental-green benefits with dollar-green ones. That appears to be the case with this deal, since Orascom’s cement ops run more efficiently than Lafarge’s European plants.

Green Cement in Egypt

. . . Why the rush to clean up? Cement makers aren’t any more altruistic than the next guy. But it takes a lot of energy to fire up kilns to 2,000 degrees Centigrade, and energy accounts for between one-quarter and one-third of the industry’s costs. To stay competitive, cement makers have to trim energy consumption and make their plants as clean as possible.

Precisely. Over the years, companies across many industries have become accustomed to the idea of a certain amount of waste in their operations as being inevitable. That works for a while, but only until a new wave of technology — or of new market entrants with different ideas — upsets the apple cart. Then you have to get leaner and make your operations (or your products) more efficient.

We’ve seen this in industry after industry, whether it’s cars (American makers responding to fuel-efficient imports) or lighting (consumers realize they can get much more cost-effective lighting using technologies besides Edison’s bulb) or mutual funds (Vanguard undercuts the rest by keeping such a low fee structure).

More and more we’ll be seeing this in heavy industry, as manufacturers come to embrace the mandate that has driven the semiconductor business for decades: eliminate more waste every year, or else get out of the business.

This item from Foreign Policy’s Passport blog describes how “Ecuador’s government is asking developed nations to pay $350 million for them NOT to drill for oil in a major field in the heart of the Amazon.”

I do take slight issue with FP’s comment that this qualifies as “a unique environmental scheme,” since it appears to be similar to the financial deals that Indonesia has been working out with Australia and other countries.

The general idea behind these moves is the same. The richest countries have something — money — that developing countries need (or want, depending on your viewpoint), and many developing countries have something — environmental goods — that the rich countries need (or want). Sounds like yet another context for supply and demand, of both money and environmental goods, to take over.

It will be interesting to see just how much Indonesia, Ecuador, and their rain-forest-possessing peers will push on this front in years to come, and how much the most developed nations will be willing to pay.

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More context from the FT (via MSNBC):

Forest nations press for carbon credits to help cut greenhouse gas

and (the Australian variety of) ABC:

Indonesia says more money needed to stop deforestation.

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Charles Fishman is subtler than that, but it’s not hard to come away from his big Fast Company article — Message In a Bottle — with that conclusion. I adverted to the article in a post last month, but I didn’t get a chance to re-read it thoroughly until last night.

Fishman’s piece is a real eye-opener. Especially if you drink much bottled water, please do yourself a favor and read the whole thing. Meanwhile, here’s a key chunk from the early going of the article to set the tone.

Bottled water is the food phenomenon of our times. We–a generation raised on tap water and water fountains–drink a billion bottles of water a week, and we’re raising a generation that views tap water with disdain and water fountains with suspicion. We’ve come to pay good money–two or three or four times the cost of gasoline–for a product we have always gotten, and can still get, for free, from taps in our homes.

When we buy a bottle of water, what we’re often buying is the bottle itself, as much as the water. We’re buying the convenience–a bottle at the 7-Eleven isn’t the same product as tap water, any more than a cup of coffee at Starbucks is the same as a cup of coffee from the Krups machine on your kitchen counter. And we’re buying the artful story the water companies tell us about the water: where it comes from, how healthy it is, what it says about us. Surely among the choices we can make, bottled water isn’t just good, it’s positively virtuous.

Except for this: Bottled water is often simply an indulgence, and despite the stories we tell ourselves, it is not a benign indulgence. We’re moving 1 billion bottles of water around a week in ships, trains, and trucks in the United States alone. That’s a weekly convoy equivalent to 37,800 18-wheelers delivering water. (Water weighs 81/3 pounds a gallon. It’s so heavy you can’t fill an 18-wheeler with bottled water–you have to leave empty space.)

Meanwhile, one out of six people in the world has no dependable, safe drinking water. The global economy has contrived to deny the most fundamental element of life to 1 billion people, while delivering to us an array of water “varieties” from around the globe, not one of which we actually need. That tension is only complicated by the fact that if we suddenly decided not to purchase the lake of Poland Spring water in Hollis, Maine, none of that water would find its way to people who really are thirsty.

A chilled plastic bottle of water in the convenience-store cooler is the perfect symbol of this moment in American commerce and culture. It acknowledges our demand for instant gratification, our vanity, our token concern for health. Its packaging and transport depend entirely on cheap fossil fuel. Yes, it’s just a bottle of water–modest compared with the indulgence of driving a Hummer. But when a whole industry grows up around supplying us with something we don’t need–when a whole industry is built on the packaging and the presentation–it’s worth asking how that happened, and what the impact is. And if you do ask, if you trace both the water and the business back to where they came from, you find a story more complicated, more bemusing, and ultimately more sobering than the bottles we tote everywhere suggest.

Especially when you consider the success of products like Fiji Water, the issues surrounding bottled water are myriad and far from simplistic, as Fishman goes on to explain. But if you have a concern for the environment, it’s hard not to conclude that the prevalence of bottled water is more than just a negative trend — it’s a big negative, and one that’s eminently avoidable.

And yet it’s also a $16 billion business, and a staple for giant companies like PepsiCo, Coca-Cola, and above all Nestlé, so it’s not going away anytime soon.

Here’s more from Fishman:

Once you understand the resources mustered to deliver the bottle of water, it’s reasonable to ask as you reach for the next bottle, not just “Does the value to me equal the 99 cents I’m about to spend?” but “Does the value equal the impact I’m about to leave behind?”

Simply asking the question takes the carelessness out of the transaction. And once you understand where the water comes from, and how it got here, it’s hard to look at that bottle in the same way again.

I agree. In fact, I’ve decided not to buy bottled water whenever I can avoid it. I don’t think Big Water will come to supplant Big Oil as a target for environmentalists’ ire, but it’s surely coming into the crosshairs.

One of the economic consequences of the twin booms in China and India — especially when combined with good overall health in the world economy — is higher prices for commodities. Prices for things like steel, rubber, and cement have trended upwards, which in general is good news for the companies that offer these products. (Just look at the fine results recently reported by steel kingpin ArcelorMittal.)

Turns out it also means much higher prices for shipping all those tons of commodities, as explained in this item from Foreign Policy’s Passport blog. So while the obvious beneficiaries of the boom in commodities have been companies like Rio Tinto, the boom certainly hasn’t hurt the feelings of shippers like Maersk, either.

Interesting thing in the Times today about the Dubai-based airline Emirates. Seems that Emirates and its chairman like their airplanes big and are essentially keeping Airbus’ a380 afloat. The a380 is a super gigantic plane that pretty much seats my entire high school* and is the basket into which Airbus is putting most all of its eggs.

Now there have been plenty of stories about Dubai and how you can go skiing in the desert and all. But this one’s interesting for a couple of reasons. Not only has Emirates ordered nearly three times as many a380s as the next guy. But the government of Dubai also just today bought a 3% stake in Airbus’ parent company, EADS.

Emirates chairman Sheik Ahmed bin Saeed al-Maktoum wants to make Dubai the major hub between West and East. Is it gonna work? I don’t like the middle seats, myself, and it would seem to be tough to avoid that on a plane that seats 550 people. But what do I know? I don’t have $82 billion to toss around on a bunch of airplanes and airplane makers.

*Of course, I’m Small Town, Texas through and through, so maybe that’s not as impressive as it sounds.

I’d like to thank Our Friend Tim for allowing me to play in his playground while he’s out riding fences, wish him well on that vacation, and assure you that you’ll be getting no Proustian references from me. (I’m a Joyce man, myself.) By way of further introduction, I’ll also let you know that my knowledge of and familiarity with the big world of business news is a bit more narrow than Tim’s. So, I’ll just direct you to IPO Central to find out what that Och-Ziff Capital Management offering is all about.

As for the iPhone, have you heard anything about that? Mr. Jobs and Apple have been their typical understated selves with the release of the fanciest phone ever in the history of the world. Still, as great and fun as it looks, all these stories about how half a million of the little wonders were sold at Apple and AT&T stores this past weekend are a bit silly, no? Can we give them perhaps a full week before we rate it a success or failure? Thanks.

Meanwhile, in my little niche, the government of Mongolia reached agreement with Ivanhoe Mines (and partner Rio Tinto) that should enable Ivanhoe to go ahead with its Oyu Tolgoi copper-gold project in the Gobi Desert. (How’s that for a narrow focus?) I know. You’re asking yourself if I just seriously brought up the Gobi Desert, but the agreement is kind of a big deal in the metals and mining sector, as the Mongolian government’s insistence on taking as much as a 50% stake in some projects there has held up development for such multinational giants as BHP Billiton, CVRD, and Xstrata. And, as Mongolia’s situated right there next to China, those companies want in on that as quickly as they can.

Thanks for having me. I’ll be here all week. (Well, not Wednesday.)

Since I first posted about this the other day, I’ve been doing some homework. (A little knowledge is a dangerous thing . . .) These three items provide some useful context on what’s happening in the Russian business realm:

• The Economist: Russia’s booming economy
• Daniel Yergin on CNBC: Russia Attracting More Western Companies
• Bloomberg News: Putin Says West Must Recognize Economy’s ‘New Balance of Power’

The main lesson I’m taking away from this is that Russia looks quite different from political and commercial perspectives. Politically, there’s a lot to take issue with: the country seems to be going the wrong direction in terms of political transparency and the overall extension of democracy. Plus Putin has been making (not-so-)diplomatic noises that Western leaders like George Bush and Tony Blair can’t like.

And then you have the business/economic front. Russia’s economy has been growing at better than 6.5% year by year; the economy has quintupled in size since 2000. And many Western-based corporations now see Russia as a key market for reaping high profits. What’s more, this profitability and growth applies not just in the oil and gas sector — which represents just 20% of Russia’s GDP even though the country is not the top oil producer in the world — but also in construction, consumer goods, and so on.

So: huge upside from a commercial standpoint, albeit with risks, weighted against big questions from a political or diplomatic standpoint.

The economy of the Middle Kingdom continues to expand rapidly, as its May surge in industrial output demonstrates. Meanwhile, a China-based auto maker called Hebei Zhongxing Automobile Manufacture Company is in talks to start selling trucks and SUVs in Mexico; this is a prelude to sales of Chinese-made cars in the US — sooner rather than later, according to many automotive analysts.

For a better understanding of Chinese manufacturing, try this long, detailed article (subscription required) from Atlantic Monthly national correspondent James Fallows, who is living in China and reporting extensively from the region. Overall, Fallows sees China’s rise in manufacturing as tonic for the US, but in this blog post Fallows cautions against the facile assumption that China’s economic boom and increasing affluence will lead inexorably to its political liberalization and eventual democratization. Given his long political experience (he was a speechwriter for President Carter and later served as editor of U.S. News & World Report) and his direct exposure to conditions in China, I’d say Fallows’ concerns are worth heeding.