Hope is not a plan

The IMF warned today that current estimates of $400-600 billion in economic losses worldwide in the wake of the mortgage crash in the United States are likely to be well under the mark. The IMF predicts final worldwide losses on the order of $1 trillion.

The IMF releases its biannual World Economic Outlook on Wednesday and already has said it would cut half a percentage point off its forecast of 2008 global economic growth, to 3.7 per cent.

The unusually harsh biannual report, particularly critical of Wall Street, comes ahead of the IMF and World Bank spring meetings in Washington over the weekend.

The IMF, whose stated mission is to maintain global financial stability, said there was a collective failure to appreciate the extent of debt taken on by a wide range of institutions - banks, insurers, government-sponsored entities and hedge funds.

Like a sort of inverse ponzi scheme in which debt is sold around in a big circle until everyone is holding onto their share of nothing, the global finance market has overextended itself and is now likely to radically overretract itself in response.

On the note of debt-laden entities, the IMF is planning a sale of 12.7% of its gold stock, an amount that should be worth about $6 billion. This sale has to be approved by quite a few member nations within the IMF, including us, so it's not yet a sure thing.

The funds from the IMF's gold sale would be used to buy US government and corporate bonds to generate income and plug a $400m shortfall in funds that is projected over the next two to three years.

This also prompted the IMF to make $100m of spending cuts from its budget over the next three years to 2011.

Notice how the previously poor countries no longer need emergency aid quite so often, as they're building up reserves. Sounds smart.

al Jazeera article

Leonid Fedun, vice president of Russian oil giant Lukoil recently indicated that without major spending on new reserves, Russian oil production could be expected to fall off sharply in the next decade.

In fact, Russian oil output fell for the first time at the beginning of this year, primarily on the back of poor weather and supply issues in Western Siberia. However, the larger problem of the depletion of proven reserves is one that will severely limit Russian oil production in the near future as long as no money is directed into developing new reserves.

Analysts at Citigroup recently said annual increases in Russian output could "no longer be taken for granted" but argued that production was expected to rise until 2012.

"I believe the decline will continue for quite a number of years."

This is not strictly a peak oil issue, in that it is understood that additional oil reserves assuredly exist in Siberia. However, high taxes and a lack of financial incentives to explore for new reserves means that companies have been avoiding extra costs and simply leaning on their available oil fields. As a consequence, the Russian oil industry may hit the bottom of its collective barrel without any replacement in sight.

BBC article

In a recent policy piece in Science Magazine titled The MPG Illusion, Richard Larrick and Jack Soll bring up the issue of how the basic way we visualize fuel efficiency -- in terms of miles per gallon -- may mislead us into making incorrect choices when it comes to prioritizing changes we make in favor of more efficient vehicles.

In short, increases in fuel efficiency among low efficiency vehicles have a much more dramatic effect than increases in fuel efficiency among higher efficiency vehicles. Consider this excerpt from the article:

To illustrate these issues, consider the criticism that has been directed at adding hybrid engines to sport utility vehicles (SUVs). In a New York Times Op-Ed column, an automotive expert (4) has said that hybrid cars are like "fat-free desserts"--they "can make people feel as if they're doing something good, even when they're doing nothing special at all." The writer questions the logic of granting tax incentives to buyers of "a hypothetical hybrid Dodge Durango that gets 14 miles per gallon instead of 12 thanks to its second, electric power source" but not to a "buyer of a conventional, gasoline-powered Honda Civic that gets 40 miles per gallon." The basic argument is correct: The environment would benefit most if all consumers purchased highly efficient cars that get 40 MPG, not 14, and incentives should be tied to achieving such efficiency. An implicit premise in the example, however, is that an improvement from 12 to 14 MPG is negligible. However, the 2 MPG improvement is actually a significant one in terms of reduction in gas consumption... A car that gets 12 MPG consumes 833 gallons to cover that distance (10,000/12); a car that gets 14 MPG consumes 714 gallons (10,000/14). The roughly 120-gallon reduction in fuel used is larger than the reduction achieved by replacing a car that gets 28 MPG with a car that gets 40 MPG over that distance.

This isn't just an abstract concern -- studies with American consumers back the idea that by cleaving to the MPG standard, we confuse ourselves about what constitutes real gains in efficiency. This has implications for upgrading vehicles as a response to resource limitation, both in the abstract ("Let's use less petroleum") and in the personal and specific ("How 'bout I spend less money on gas for my next car").

In other words, make your van more efficient before you make your car more efficient, if you have to choose. And, if you're mandating efficiency via legislation, focus on the low end first, because it's where the largest gains can be made.

You can also hear an interview with the authors on the June 20, 2008 Science Magazine podcast.