Tuesday, October 23, 2012

EU's migrant rules prove the referendum case

So Scotland is to get an independence referendum to be held in 2014.  For people like me, who want a referendum on Britain's (England's?) place in Europe, the wait goes.

But the case for EU withdrawal or radical renegotiation is growing by the day.

Take last week's news that the EU is trying to force the UK government to pay benefits, including pensions, to any EU citizen who applies for them.  The EU wants to stop Britain applying its "habitual resident test" to ensure that foreign claimants are genuinely settled in the UK and have paid taxes here.

I think you would be hard-pressed to find more than 2% of the British electorate who would support paying benefits out to foreigners who haven't contributed anything to the country beforehand.  But our democratically-elected government is being forced to do so by the European Commissioner for Social Affairs, an unelected Hungarian who we have no influence over whatsoever.

And this is not some minor irritant.  Control of public spending, given the size of the deficit and the challenge of funding growing numbers of retirees, is crucial if the UK economy is to survive never mind thrive.

The EU would argue that they are sticking up for the rights of immigrants but the best way to ensure that is to have clear, fair and properly enforced rules to reassure the host country's citizens that they are not being taken advantage of.

A group of Tory MPs recently proposed a scheme where UK immigrants would earn their rights to benefits, housing and healthcare over time by working and paying taxes.  They might have added that the immigrant would lose these rights (and ultimately their right to reside in Britain) if they committed any crime.

This might seem tough but it would transform the immigration debate overnight.  The suspicion that immigrant communities are a drain would lift.  Now the very word "immigrant" suggests a burden and a problem but perceptions can quickly change with some clear rules.

Immigration should be a massive plus for Britain.  Not just the cultural vibrancy it brings but hard economic benefits - an improved dependency (worker to non-worker) ratio, a better workforce for our companies and lots of imported skills, capital and connections.

A scheme where residency rights for all immigrants, both EU and non-EU, were dependent on contributing to the system and staying on the right side of the law would ensure that immigration delivers these gains and regains popular trust.

But the EU wants us to go in the opposite direction which will further undermine perceptions of immigrants and make mugs out of honest taxpayers.  I wish it was a Referendum on Europe we were getting ready for in 2014.

The People's Pledge - EU Referendum Campaign

From the website:  Service for Spanish autonomos

Sunday, October 14, 2012

What two years flying Ryanair will do to you

Not really me (it's been a while since I was 36 for one thing) but I do fly Ryanair a lot.

You would think two years commuting back and forth between Stansted and Malaga at Michael O'Leary's convenience might take its toll.

Well yes and no.

The downsides to no frills air travel are well known - minimal leg room, a dash for seats, luggage nazis monitoring your hand luggage etc

All true and I can't say that I am a Ryanair fan exactly.  There is a certain arrogance about them; they can be almost defiantly rude and wilfully careless of what their passengers and the public think.

My theory is that they like all the bad headlines (like Woman forced to pay £200 to print boarding tickets) because of a perverse kind of logic.  If they can be so awful to customers and still book out their routes they must be the cheapest.

And they usually are.  That's my first plus point - I shop around and they usually come out cheapest although less so nowadays.  All the "cheap" airlines are a lot more expensive than they were only a year or so ago.  That's partly the government's fault for putting up the tax remorselessly.

Another plus for me is that, once you know the system, the journey is quite predictable.  You know they are strict about hand luggage and pack accordingly.  You know you have to get in the queue early to get a good seat (or pay for Priority).   You know you have to print your boarding pass.

Finally they have been amazingly punctual.  I literally cannot remember the last time they were late either flying into or out of Malaga.  It was certainly over a year ago.  I have recently started to fly out o Gatwick with Easyjet on a Friday evening (better flight time) and they have been late twice on the trot.

(UPDATE: the first time I flew Ryanair after I published this blog I was delayed by about 45 minutes.  I should not have opened my big mouth!)

So (and it pains me to say it because of their lousy attitude) - two cheers for Ryanair.

From our website:  Spanish income tax

Thursday, October 4, 2012

7 reasons to doubt the oil optimists

Recently I wrote about "Trough Oil": the idea gaining  ground that Peak Oil pessimists were wrong and that oil going to become abundant and cheap in the coming decades.

I laid out the causes for such optimism in the original article but in this follow up piece I am focusing on the counter-arguments: why increasingly hard to satisfy oil demand will continue to keep oil prices high for decades.

1.  The current oil price

If new sources of supply are coming and demand is set to fall, why is the oil price so high?  Even with a hard landing in China, crisis in the Eurozone and world trade volumes crashing the oil price is stuck well over $100 a barrel for Brent crude.  Most oil traders expect it to remain so for the next couple of years at least - forecast.  By comparison weak demand conditions have ushered in $20 or even $10 oil in the past. These market insiders are telling us that the oil market fundamentals are still tight.

2.  Maybe production did peak in 2005

Oil production has actually risen in recent years but look behind the numbers and there have been changes since the middle of the last decade.  Production growth has slowed despite trillions of dollars of investment and Saudi Arabia, long seen as the world's "swing" producer, pumping at record levels.  See chart here:  world oil supply is not growing very much.

Secondly the proportion of oil output that isn't actually oil has increased.  Natural gas liquids are the main alternative to crude but have about 70% of the energy value which is why they sell for less.  Others include ethanol which is only viable thanks to what I would argue are crazy and damaging government mandates which are becoming increasingly controversial as food prices rise.

3. Production costs put a floor under the price

All the new sources of supply people are talking about come at a price and it is not much lower than $100 in many cases.  For example the Canadian tar sands oil extraction process uses a lot of water and energy to make something usable and this can cost $60-80 a barrel.  Approximately 2 million bpd now comes from this source so it's not small beer.

Other new sources such as US shale production, including 0.5 million bpd from the Bakken fields on the US/Canadian border, are cheaper but they still use a lot of water and energy and exact an environmental price critics say.

It is the marginal cost of the last couple of a million bpd that matters when it comes to setting a minimum oil price and that cost is rising.

Peak oil was never about oil "running out" - it's more that the big (easy) fields are declining faster than new sources can be economically developed.  That assumption still looks to hold and preludes the possibility of the oil price ever returning to much below 80$ whatever the economic conditions.

4.  Technical challenges are growing

This is a similar point to 3. but is about the difficulty and danger of extracting new reserves rather than the cost, particularly when it comes to deep sea drilling.  The Horizon disaster vividly illustrated what can go wrong with deep sea drilling but perhaps even more pertinent is to look at the reserves Brazil intends to exploit off its Atlantic coast.

These are so large (50-100 billion barrels or even more) that they alone count as one of the major reasons for Trough Oil optimism.  To put that number in context that is perhaps 1/3 of another Saudi Arabia.  But the catch is there are thousands of feet of salt rock between the ocean floor and the oil trapped beneath it.  Much of the oil is beyond a depth that even "ultra-deep" rigs are currently able to go (7,500m to about 10,000m) and the deeper you go, the more pressure and the more risk.  The Horizon disaster happened at just 1,500m.  New techniques and perhaps a $1 trillion may be required.

None of this suggests the fight to keep the world's thirst for oil satisfied is going to be either cheap or easy.

5. Declining consumption in the West will be more than offset

One of the main focuses of optimism on the demand side is that  oil consumption in the West is on a declining trend even allowing for the effects of the economic crisis.  It is true that high prices, recession and more efficient cars have combined to reduce oil consumption slightly in the US and other developed markets (but by less than 1% between 2000 and 2010 according to one chart I saw).  But this has been more than offset by rising demand from China and other fast-growing countries and I expect this to continue.

In the short term I am a China bear and I think the troubles that afflict that country will have big knock-on impacts through places like Brazil and Indonesia.  However long term there is nothing that will prevent the economic rise of the developing world and the consequent increase in competition for scarce resources.

It might be a bumpy ride but the big picture is still one of hundreds of millions of people emerging from relative poverty to something approximating a middle class lifestyle with its attendant consumption patterns: a richer diet, more travel and especially buying a car.

6. Oil producers keep more of their own oil

One of the key warnings of Peak Oil pessimists is that the problem of declining output by traditional producers is that they will increasingly consume more of their oil domestically leaving less for export. This was one of the main arguments convincing me that from now on oil prices would stay high and it would get tougher and tougher to supply demand.

And it's playing out just the way the doomsayers predicted.  Middle Eastern consumption of oil rose by 55% during the first decade of the millennium more than cancelling out the small declines in the West.  Saudi Arabia, which burns oil to generate electricity to power air-conditioning units and water desalination plants, now consumes 3 million of it's 11 million b/d total output.

7. Carry on guzzling

Transport, including aviation, accounts for about 75% of oil demand.  Despite gently declining car use in the West and more efficient vehicles being mandated by governments, demands for oil to fuel transport globally is almost certainly going to rise in the coming decades as it has done for decades past.

We have already discussed the essential reason for this - the growing size and power of the middle classes in the developing world.   The only thing that could prevent a remorseless rise in underlying oil demand - apart from the BRICs and other fast-growing countries going into rapid economic decline which seems unlikely - is a switch from petrol/diesel to something else.

Oil optimists point to clear signs that governments and  leading major manufacturers are getting behind electric cars.  Other alternatives to oil are natural gas, hydrogen and even liquid air.

But the odds are that they will all remain a niche for the relatively well off or environmentally-concerned.  This is not because there won't be technical advances in, for example, batteries but because the petrol car economy is so embedded (at such a vast sunk cost) that even a superior form of automobile technology would face a massive struggle to overturn it.

Consider vehicles powered by liquified natural gas which have been around for decades.  They do not require any great leaps forward in technology, new refueling infrastructure (many filling stations already sell it) or a new fleet of cars (petrol cars can be converted quite cheaply).  And gas - in the US at least - is 1/7th the price of oil.  But only a tiny fraction of the US vehicle fleet is powered by gas.

In summary - the global petrol engine population will continue to faster than the increase in fuel efficiency; oil supply from the "easy" sources of the past will continue to dwindle and prices will stay high.  This has important investment implications but that will be for another post.

From our website:  Spanish pension benefits 2012

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