Uncle Sam

If I Were Uncle Sam

Sanjeev

Sanjeev

I got this idea from the topics for our debates at school, where we often debated our respective “world views” from a rather grandstand (that is how they got the word, I think). Of late, you find the US media full of advice for Uncle Sam, who seems to have fallen on decidedly bad times, even if he is still not on the way to the poorhouse.

Declaimer: This article was originally in December 2004, and some data points may be outdated.

For one, Uncle Sam uses too much energy to live and does little work that is of any use to the rest of the world. His Hollywood movies and TV channels, burger-selling, and kirana stores, may count for a hefty chunk of GDP as far as numbers go, but these activities don’t even count as GDP in some other countries of the world. He saves so little, that he has to “depend on the kindness of strangers”, according to one memorable quote. As he nears retirement, he finds himself in debt, owing nearly 4 years’ income to these strangers in Asia, some of whom may no longer be very kind. And he continues to go deeper into debt, to the extent of 6% of his yearly income (GDP). Half of his Government debt is now owned by foreigners.

Hardly the vital statistics of the richest nation on earth, and the only super-power. Something has to change………..either the debt has to be repaid, or the nation will lose its pre-eminent “super-power” status. This may not be the first time this has happened, though. Britain went from being the biggest creditor in the world before WW1, to the doldrums by the end of WW2. And the Pound Sterling lost its position to the Dollar.

To even start to turn things around, the first and most important item to cut down is its energy costs. That is because rising energy cost represents the single largest threat to the Current Account Deficit ballooning out of control. Simultaneously, it is still the single largest item of potential cost control, which could single-handedly turn around the Current Account Deficit.

Focusing on China/ India, everybody’s favorite whipping boys will cause great political pain across the US economy. A very large number of small items, almost covering the entire range of manufactured goods, would come under the axe. Any attempt to arm-twist China might backfire into a broader battle with Asia, which, if taken to its logical conclusion, might even hurt the progress of globalization. Experience with Japan would suggest that such a course of action would not be practicable.

A far better political option would be to focus on quick and effective “energy independence”. Oil, which is America’s biggest import, would naturally account for the biggest outgo of Dollars from the US. But the odd thing is this: only 24% of US imports of oil are from the Middle East; a far higher proportion, 50% of imports, come from “friendlier” countries like Canada, Mexico, Venezuela, and Nigeria. Of course, American “energy independence” would sharply bring down the price of oil, indirectly hurting the Middle East economically, and (most importantly) sharply impacting their geo-political influence across the world.

This focus on “energy independence” is what we will now see in many forms across the world. In the short term, it will mean a desperate search for alternative sources of oil (like China and India tying up reserves in Russia/ Brazil). But even in the medium term, it would mean a far more drastic change in the world energy scenario. A large number of alternatives will be explored, with the most important criteria being cost, then “energy independence”. Mostly, it will mean “domestication” of the sources of energy, or in some cases, with a “strategic” neighboring country. A good example is the tar sands in Alberta, Canada (estimated official reserves at current extraction technologies 180 Bn barrels), which has reserves comparable to Saudi Arabia’s mammoth 259 bn barrels.

In the slightly longer term, it would have to mean complete “domestication” of the energy industry. This could be technological (fuel cells, nuclear energy, for example) or agricultural (waste, like in India; or “grow your fuel” in the US).

The benefits are obvious. Economically, the US would go back to zero Current Account deficit. A large number of jobs would appear in the nascent (new) energy industry, and this would bring back some energy-intensive manufacturing. Overall, it would have a salutary effect on US manufacturing, which has been the worst hit, post-2000.

The current problems of personal indebtedness, a housing bubble, and large debt holdings would have to be run down, but at least fresh damage would be arrested and confidence restored in the Dollar. This itself would go a long way in correcting the “structural imbalances” in the world economy. The problem of inadequate personal savings and excessive consumption is a behavioral problem with the US populace, which is far more difficult to correct.

The political and geo-strategic benefits would be even bigger. Not being an expert on this, I would hesitate to comment, but I would reckon that similar trends would be set off in Asia, with a “domestication” drive, that would leave the Middle East with little “strategic” importance. Just the US dropping out would be enough to chasten the Middle East into submission.

Few would be willing to bet on it, but we may be sitting at the start of an incipient trend toward just such a scenario. While there is almost universal agreement on the fact that oil prices will stay high, and production from current oil reserves will start to peak, despite massive investments over the next 3 years; the energy mix of most countries will start to change. This trend will be led technologically by the US, but will seen equally clearly in China and to a much lesser extent, India.

In all this, we have not yet brought in environmental factors, which will start to weigh in. It is difficult to speculate which technology will win over what period, but the broad consensus seems to be that natural gas, is followed by electricity generated by coal, hydel, and nuclear energy. At the fringes will be bio-mass (agricultural waste), with fuel cells bringing up the rear. Although there is a chorus,  speculating that if energy costs have to go to zero in the 21st century (like communication costs went to zero in the 20th), fuel cells have to get better.

There is a small voice in America asking to consider this: if the huge agricultural base of the US were to be turned towards “growing their fuel”, would it not solve everybody’s problems? Employment would be generated, American agriculture would see a renaissance, the Current Account deficit would be balanced, the Dollar would be defended, and the Middle East would be neutralized.  And in the interregnum, Fuel Cells would get better and better!

The whole thing sounds like a childish dream, but one that has its basis in reality. It is technologically feasible, but the key problem would be political. Most importantly, Big Oil in the US would not like to see the world’s largest industry reduced to a perfectly competitive, fragmented market with no pricing power. There is simply too much money to be made in the current structure of the industry. But history teaches us that it is difficult to stop the emergence of an idea whose time has come.

But I am NOT Uncle Sam. The real Uncle Sam is himself an oil man, who has already gone to war looking for oil. There is an old saying, “If you are not part of the solution, you are part of the problem.” In this case, the problem has to be solved.

It has not turned out as good as the last one. The next time, I will take the deadline as the 5th of the month, so that I will have time to work on quality.

Also, once I have access to the databases, www.securities.com, and CMIE, I should be able to do some stories with a local flavor.

You should have a small corner in your magazine that puts out “maps” of sectors that are not covered widely, eg, edible oils, cotton, jute, plastics, milk, etc. These corners should track “big trends” in these local sectors, and their impact on stocks. Nobody in the media is doing this with any detail, so the understanding of these sectors is completely flawed.

Let us take my favorite sector………….sugar. Quietly, the story in the sector has changed. Sugar stocks are down to 7 mn tons officially, but the open secret is that stocks are down to 4.5 mn tons. Next year’s deficit is 7.5.mn tons, meaning that India will end with MINUS 3mn tons this season (Oct 2004 to Sep 2005). Prices, which were supposed to be below Rs.16 according to the Govt, are already at Rs.17+. They could peak at Rs.20, maybe more.

The big news is that production for next year will go up to only 16.5 mn tons from 12.5 mn tons this year (because the mills that are supposed to increase production are not operational). The base production on which growth is to be established, is only 12.5 mn tons, not the peak production of 21 mn tons in 2002-03. This means that leaders like the big cos have to double production to get back the kind of stocking level needed for reasonable prices.

I am sure many such stories happen in other sectors, except nobody is watching. Half the watching is about reading the papers carefully. The other half is about talking to the cos. And you have a story. Cover 20 sectors and you will have no shortage of content.

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