What goes up must come down (please, please, please)

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

Over the centuries, our world has experienced many financial bubbles, most recently from real estate.  Most of these bubbles have been burst in large part by some increase in supply, either through improved crop yields or just building more homes or silicon chip factories.  However, as the emerging economies become wealthier, their populations healthier, the ability to continue to limit price increases by upping supply has diminished.  This is particularly so in the world of finite commodities and even more so in oil.  Recently, the International Energy Agency stated that even with soft global economic growth, the oil producing nations will find it difficult to meet the world’s demand requirements of 89 million barrels a day in the second half of 2011.

 

The result of this supply constraint – which cannot be remedied in weeks will be the pushing up of oil prices (Brent crude has been trading at triple digits for almost the entire year).  Motorist will feel the pinch immediately and the rest of society will feel it in the following months as wheat prices (50% of which is derived from the price of oil), transportation etc. move up or possibly down in the case of houses in the exurbs.  For those living in the risk world the demands for hedging will possibly move from idea to necessity as business’s struggle to lessen the pace and impact of another wave of commodity price increases.  I believe that it will be the pro-active risk managers that are acting now that will survive and possibly thrive in this new environment.  Hopefully you will be one of them.

 

For more Jeff Rubin’s thoughts on oil prices, click on the link:

http://tinyurl.com/5wnlwdb

“I cann’t do it Captain (of industry). We got no power."

by Michael Arbow, MBA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com

 

With these words Chief Engineer Montgomery Scott (Scotty) of television’s starship Enterprise would warn Captain Kirk of the ship’s limits and capabilities.  These very same words are being said again but this time in China where the providers of electric power are warning China’s industries to expect massive rolling black outs and power restrictions this summer.  With subsidies in coal (where industrial users pay 1/10^th the price of oil) and oil, Chinese industry burns through the stuff with near hopeless abandon.  The subsidies may end, eventually, but in the interim expect the demands for energy making stuff – like coal, oil, uranium and equipment like windmills, solar cells, generators to increase.  Assuming you don’t work in the oil industry or at General Electric; sadly what is China’s problem is our problem.  Commodities will continue to rise as will the currencies of those who produce the goods and this will be over a number of years.  In the short term look for another spike in energy prices this summer.

 

While this may sound like a broken record, I fear and sense that many industries and governments are not fully preparing for the shocks and have not put in place risk reduction measures.  Some of these will be long term (energy efficient buildings and infrastructure like public transit) and some will be short term (hedging strategies).  The past is past and we are entering a new dynamic environment – has your risk perspectives and handling changed to better suit this new world?

 

For Jeff Rubin’s thoughts on this subject, click on the link:

 

http://tinyurl.com/4348gtm

 

Help – this roller coaster goes up and down!

by Stephen McPhie, CA

Partner, RSD Solutions Inc.

www.RSDsolutions.com

info@RSDsolutions.com 

 

Saudi Arabia’s oil minister recently commented that he thinks the world crude oil market is oversupplied.  His Kuwaiti counterpart agrees.  They believe that prices are driven by speculation.  This is not much comfort to you and me when we fill our cars up at the petrol (gas) pump.  (Actually I personally can barely afford to fill my tank any more but that is more to do with the tax regime in Britain than world oil prices.) 

One thing that appears apparent is that when prices of anything go up or down very fast, especially if it appears that speculation is a major factor, rather than demand and supply fundamentals, they tend to overshoot and come back off their peak or low point. 

The last time oil prices peaked at a higher level than where they are now and they come off quite quickly and quite a long way.  A client who came to us after this and who suffered major losses would have been all right if their derivatives intended as hedges had matured a couple of months later.  After all, as they said, nobody would have expected prices to do what they did!  However, their “hedges” actually increased their risk.  They were unsuitable and the company did not understand them properly. 

The client would also have been better off had they done nothing.  But they would have been best off with a properly conceived hedging approach.  They should have avoided expecting or not expecting anything out of the ordinary.  The only thing that will inevitably happen is “unknown unknowns” and a risk management system should be designed with this in mind.