Tuesday, July 22, 2008

The Slimy Truth About Oil Prices

You've simply got to love the over-simplified, under-reporting modern day media. Just when you think they've managed to dumb the news down, they find a way of dumbing it even, um, downer. My favorite dumb news story of the year has to be the continuing saga of oil prices, with every pundit proclaiming his or her theory as to why you're paying twice as much for gas as you did two or three years ago.

Some of these wiseguys peg the pricing to a mythic relationship between supply and demand. "We're using up oil faster than we can produce it," they whine. "What we really need to do is drill or more oil. That way, there will be more supply and the prices will drop."

Um, no. Hate to tell you this, but it doesn't work that way and hasn't worked that way for several decades. If you really want to know why the price of gas and oil has broken through the roof, you can blame the screen on which you're reading these very words. Yup, it's not supply and demand that's messing up your driving vacation.

It's technology. And this is how it happens:

First, understand that half of any solution is in identifying the problem. Once you figure out what the problem is -- and I mean really identifying the problem as opposed to accepting what drools out of any talking head, you're going to find that there's plenty of oil out there. Tons. Thousands of tons. Millions of barrels. Check out your history books and start looking up the last time the world's major oil suppliers actually reduced their output of crude. While you may find one or two events, you'll find plenty more instances in which the members of OPEC who cut their production were undercut by other members who increased production to make up the difference.

Second, if you look at the price of oil from 2006 to 2008, you'll see a massive increase in the price, but no major difference in the amount of oil produced. Starting to smell something funny? If supply and demand were really to blame for oil price increases, wouldn't the amount of oil being delivered throughout the world be shrinking?

Well, it's not. In fact, the Saudis just turned the spigot by something like a half million barrels a day and prices actually went up.

So if supply isn't affecting anything, and demand isn't affecting anything, how would technology affect anything? Easy: Because it's the job of technology to transmit and manipulate information, it's technology by which market makers choose their actions. And since the technology is interpreted and manipulated by humans, what appears to be raw, technological data is actually raw, human emotion at work.

Consider the fact that the average barrel of crude is traded back and forth ten to twenty times before it ever reaches its refinery. That's a lot of people buying and selling, speculating -- and hoping -- their investment goes up. Which means the oil market itself is driving up the price of oil. Not the oil companies. Not the arabs. Not OPEC. It's good old American free market capitalism, powered by nano-bits of data and genuine human greed -- and panic -- that determines the price of oil.

Think I'm out of line? Let's switch from the sticky stuff and go for the green. Throughout July, 2008, the most battered sector of the stock market was the financial sector. Prize stocks like Bank of America (BAC) and Citibank (C) got taken to the cleaners. Bank of America, perhaps the strongest banking organization in the country, saw its stock slide from the mid-30's to $19 a share. Why? Did all of BAC's investments and value suddenly evaporate? Of course not. But you'd never know that if you watched the market -- and the media -- panic about the future of financials. Those of us who prefer truth to tantrums quietly bought more BAC at $20 or $22 and saw the stock climb back into the low 30's a few days later.

Same thing is happening to oil. It's not the people who produce it or refine it or drive Escalades and Hummers that are driving up the price of oil. It's the guy glued to his trading screen, basing his calls on what other traders looking at their screens are doing. It's the internet, baby.

And all this time you thought it was for downloading free porn.

Wednesday, July 16, 2008

Jesse Jackson's Branding Meltdown

When you've been around the business as long as I have, you get to see a lot of great brands being born. The only trouble is, you get to see a lot of great brands die, too. Actually, that's not the only trouble. The real horror is watching once-mighty brands decay. To see one breaking down in real time, one need look no further than to the midwest, where we join the meltdown of Reverend Jesse Jackson, already in progress.

There are some of you reading this who never knew a life without online access. There might even be a few of you who can't remember life without fax machines and MTV. But I assure you, there once was a time before technology kept prompting you to look over your shoulder. There was a time when nobody had a cell phone to capture police beatings, upskirt shots or air show disasters.

Of course, even before the age of invasive video, there were such things as TV cameras, microphones and sheer human stupidity. This would be about the same time that one American electrified black audiences and terrified more than a few white ones with his ability to raise political awareness in direct proportion to the volume of his rhetoric. That man was Jesse Jackson.

To you Obama fans, the off-air/on-mike racist comments of an old, tired black social leader is no big deal. So what, you might say, if this ancient relic from the sixties dished out some street trash in the studio. But you'd be missing the big story here. Back in the sixties and seventies, Jackson was a political and social icon. The man mobilized millions, instilling African pride in poverty-stricken neighborhoods, fighting for justice wherever he could and for publicity whenever he could. Okay, he was a showboat. But he presented America with the first legitimate image of political black power.

It was Jackson who launched the first credible effort to elect a black president -- and he did it more than one time. In fact, it might be fair to say that if it hadn't been for Jackson's shouting, Obama wouldn't be waxing quite so eloquently today.

But just like General Motors, Maytag, Kodak and a host of other great American brands, Jackson reached the point at which he no longer felt he had to nurture and sustain it. He came to believe his own invincibility and his hubris began to eat away at his virtuous image.

He fathered children out of wedlock. His political and social movements deteriorated into shakedowns of private and public enterprises -- one of which resulted in a lucrative beer distributorship for one of his sons. Jackson soon turned to the dark side, forsaking his conscience for personal gain and losing his following until all he had left were his greed and ego.

This week, Jackson was caught off the air (but on mike) threatening Obama's own social programs and referring to his own people as niggers. Not the hip-hop "niggah" that still sends a shiver down my spine, but the real, old-fashioned boy-is-that-racist term.

And this from the guy that stood by the side of Martin Luther King.

People might be thinking about how to punish a guy like Jesse Jackson, but I assure you, he won't get anything near the treatment they gave Don Imus. In the long run, there's really no need to punish Jackson anyway. He's suffering enough, doomed to live in the past for the rest of his life.

Monday, July 07, 2008

GM = Gross Mismanagement

I don't know if it's me getting older or the country getting dumber, but I couldn't believe my eyes when the Associated Press unleashed this article on its unsuspecting public:

"GM said to consider more cuts as market shrinks," read the headline, followed by this bit of journalistic genius:

DETROIT - General Motors Corp. may get rid of some brands, speed the introduction of small cars from other markets and make further white-collar job cuts as it tries to deal with a shrinking U.S. auto market.

Let's just take a moment to reread that headline very slowly.  GM is considering more cuts because the market shrinks?  I don't think so.  The market for cars isn't shrinking at all.  The market for outdated, denial-based automobiles sure has, which is why GM stock is at a 50+ year low -- even when you adjust it for inflation.

A more accurate headline would have been "GM finally gets its ass kicked after generations of denial."  Not because GM makes a terrible car.  They don't.  In fact, my whole family drives GM cars and every one of us loves them.  The problem with GM is the same problem we have in boardrooms across this country:

Too many decisions are being made by people who don't feel the effects of their decisions. 

That's no slap at anyone in particular, it's just the way life is. Carl Icahn is famous for pointing out the folly of rewarding highly paid CEO's like Angelo Mozilo of Countrywide or Bob Nardelli of Home Depot for failing at their jobs.  This is pretty much the same thing.  After all, if Nardelli or Mozilo actually felt the consequences of their decisions, their enterprises might still be thriving today.  But they don't.  Mozilo never lost his home due to a deceptive loan practice and Nardelli never got laid off from the Gardening Department.  We're talking about decision makers who take down tens of millions in annual pay even before they get fired.  A five or ten dollar hike in gasoline prices has no effect on them.  It equates to something like a tenth of a cent hike for people like you and me.

Those of us with more than a few strands of gray running through their forelocks can recall the first arab oil embargo of the 1970's.  People waited in long lines for hours for the chance to fill their tanks  at what were then record high prices.  Supply was so short, that for the first time since the Second World War, gas rationing became the standard.  You could only fill up on certain days of the week depending on whether the number on your license plated was odd or even.

Since that time, all the talk has been about the oil supplies running lower and global climates running hotter.  Do the math and that works out to something like forty years of oil scarcity being at the top of the public's mind.  Forty years is a long time to simply ignore reality.  Hell, even the army retires you after twenty.  

With all its resources, General Motors should have seen the writing on the wall and gotten its act together way sooner.  The truth is that they did see the writing on the wall, they just conveniently decided to forget how to read.  They could have kept their gas guzzlers in production for the steadily dwindling proportion of buyers.  But at the same time, they could have been leading the way in the design and production of smaller, alternative cars.

They didn't.  And now GM is said to be considering selling off some or all of its brands.  Brands like Hummer "should be going for a cool billion dollars," according to GM.  When they open their eyes, however, they're going to find the brand selling for less than that.  A whole lot less.

GM is getting what it deserves for ignoring the basics of smart business.  They bluffed their way for years and now the market has called their bluff.  The only cards GM has left, as the saying goes, are jokers -- and nobody is laughing.