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Fuel Costs Just Part of Airlines’ List of Woes
Jeff Baily, New York Times
Even before the recent flight cancellations, airlines and passengers were facing a new wave of travel misery.

Record-high fuel prices and the industry’s fragile finances have led to a new round of bankruptcies among smaller carriers in recent weeks, including ATA Airlines, Skybus and Aloha Airgroup.

Bigger airlines are shrinking their fleets to cut fuel costs, even as demand for travel remains strong - meaning flights are growing more crowded and unpleasant.

... In the near term, airlines cannot raise fares fast enough to cover rising fuel costs; oil settled at a record price on Wednesday, $110.87 a barrel. That has plunged the industry back into the red after a brief two-year run of profits. A Merrill Lynch analyst, Michael Linenberg, expects the industry to lose $1.9 billion this year.

... The industry’s biggest problem is the price of jet fuel. It follows the price of oil, which has more than doubled since dropping to $52 a barrel in January 2007.

With current air fares, a lot of planes simply cannot operate profitably.
(10 April 2008)

Energy Price Controls In China
Byron W. King, Energy and Oil
Every American who lived through the 1970s remembers that energy price controls lead to inefficient use patterns and large losses to industry. Unfortunately, the Chinese have not learned this American lesson despite large amounts of industrial espionnage within the U.S. over the past 20 years or so.

According to Chinese news agency Xinhua, the Chinese government has frozen electricity prices to prevent rising coal costs from flowing through to end users.

In consequence of price caps on electricity rates, soaring coal prices have forced many power plants to run at a loss. Among 4,773 large-capacity power plants in China, almost 42% recorded losses in the first two months of 2008. This is 6.35% more than a year earlier. The losses totaled 13.79 billion yuan ($1.97 billion), or more than triple the year-earlier figure.

Zou Yiqiao, director of the price and financial supervision department of the State Electricity Regulatory Commission (SERC), has advised major power companies to merge with or acquire coal producers and transporters to help stabilize costs and supplies. Zou reportedly stated that utilities should slow the expansion of their thermal-power capacity and instead invest in coal transport firms and mines.

According to a SERC spokesman, the Chinese government will “allow power costs to reflect coal prices” some time in the future. In addition to thermal coal plants, China has a major program to build out renewable energy sources and boost electricity output.

Note: Byron King is a frequent contributor to the free e-letter Whiskey & Gunpowder.
(10 April 2008)

Predicting the End of the Commodity Bubble
Martin Gilman, Moscow Times
For once in history, Russia appears to be on the right side of a global price trend. As one of the world's major producers of commodities -- not least oil and gas -- the country is reaping a windfall as commodity prices soar worldwide. But is this price boom another bubble that will burst just as we have seen in real estate markets in a number of countries? Is Russia prepared to deal with the consequences of price volatility?

This is not an academic point. Many still remember the role that declines in oil prices had on weakening Mikhail Gorbachev's Soviet regime in the 1980s and on triggering the 1998 financial crisis.

... Is history about to repeat itself? And could Russia be an unintended victim of a commodity price bubble that will soon burst?

You have to wonder when looking at recent price trends. It is not just the headline numbers concerning historic peaks for oil and gold. Oil prices have risen from $66 per barrel a year ago to $101 on April 1. Gold rose by 37 percent over the same period. Other commodities have followed suit. In the last year, wheat prices have risen by a third, rice prices have doubled and copper rose by 22 percent. Overall, the Economist commodity price index is up 32 percent in dollar terms.

These price spikes have occurred even in the absence of a supply shock similar to that of the 1970s. Global commodity markets are very tight, but it may be that the primary driver of surging prices today comes from some other source.

Of course, there may be specific factors affecting the prices of individual commodities, such as the "peak oil hypothesis" or that corn prices have been impacted by U.S. subsidies for ethanol. But it must be more than a coincidence that commodity prices have risen virtually across the board. Some macroeconomic explanation must be involved.

Martin Gilman, a former senior representative of the IMF in Russia, is a professor at the Higher School of Economics in Moscow.
(9 April 2008)

Climate Change Opportunity
Fred Krupp, Wall Street Journal
In the Frank Capra movie classic, "It's a Wonderful Life," the Bailey Brothers Building and Loan is facing a Depression-era bank run. George Bailey leaps over the counter, blocks the door, and says to the panicky investors that they're "thinking of this place all wrong."

Today's investors need to hear the same message: If you're worried that stopping global warming will wreck the economy, you're looking at this all wrong. Solving global warming will be an added cost, yes - but a bargain compared with the economic cost of unchecked climate change. And fixing this problem will create an historic economic opportunity.

Energy is the biggest business in the world, "the mother of all markets," says venture capitalist John Doerr, Google's first funder. The winners of the race to reinvent energy will not only save the planet, but will also make megafortunes.

Mr. Krupp is president of Environmental Defense Fund and co-author of "Earth: The Sequel - The Race to Reinvent Energy and Stop Global Warming" (W.W. Norton, 2008).
(8 April 2008)