26 June 2014

Boyhood dreams in the South China Sea

When I was a boy, the best present my dad ever gave me was a book called "Modern Warships", a sort of technical manual of the 100 best fighting vessels deployed by navies around the World.

I used to pore over the specs for every ship in that book: speed, ranges, armaments, sensors and imagine how they would fare against each other.  But mainly I thought about the heavyweight title: who could win the big one between a US carrier group and a Soviet submarine pack?

I wasted hours thinking about this. Would the Americans detect an Oscar class missile sub before it got close enough to launch its cargo of cruise missiles? Would they be able to detect and avoid ship killer torpedoes? How good are helicopter sonars?

Two reason I gave up on this conjecture:

  1. With the end of the Cold War, all those high tech systems and superbly trained men and women were relegated to pushing around third world nations (you don't need the best of the best with the most cutting edge technology to blow up the Iraqi navy); and
  2. I grew up.

What is surprising to me is the number of experts who have not, given the amount of ink being spent on considering whether China can build forces capable of defeating the US Navy and taking control of the South China Sea.

Suddenly you can't Google "South China Sea" without some pundit opining on whether the Chinese will build a fleet to challenge the US 7th Fleet, or whether the Chinese are ever going to finish their aircraft carrier or are they building a super missile designed to sink a Nimitz class?

I have an alternative question:  Who the Hell cares?

The reason for the excitement is the tension between China and every other country that borders the South China Sea over who owns which part of it.

And the reason for the tension is the same reason as everywhere else in the world - oil.

Lots of it.

The sea might have as much as 28 billion barrels of crude under its waves and China, Japan, Vietnam, Taiwan, Cambodia, the Philippines, Malaysia, Singapore and Brunei all make claims on various bits of it.

Given the size of the resources up for grabs, every nation state is keenly pressing their claim.

China is using its growing naval power and sheer economic clout to harass and bully other claimants, moving oil rigs into areas disputed with Vietnam and building an artificial island complete with port and airbase on a reef west of the Philippines.   Its naval and coastal patrol vessels surround and threaten their counterparts around these facilities.

Given all this posturing and the US alliance with Japan, Taiwan and the Philippines, lots of people who should know better keep asking "who would win a war between China and the US?".

The sad and sorry truth for all these pundits is its a bit like asking who is more likely to stalk me: Olivia Wilde or Emma Stone?

Lets look at the break down (the China/US situation not the Wilde/Stone situation in which I think I marginally prefer Wilde).

In 2013 the Chinese exported $440 billion to the US and imported $121 billion from them.  In the same year the Chinese invested over $4 billion in US investments and Americans invested $3 Billion in China.

The Government of China holds about $1.2 trillion (that's $1,200 billion) of US government debt (about 8% of the entire US debt).

A conventional shooting war between the two countries would be the second most devastating thing to each economy.

The only thing worse would be a nuclear exchange.  Which is the final and irrefutable reason why they can't  go to war.

In the US all talk of putting down the regime in North Korea pretty much ended in 2006 when they successfully detonated a weapon and, despite Pakistan harboring groups that were active in Afghanistan during the American occupation, there was never any serious discussion about invading.

The US never gambles about nukes, a policy I sincerely hope they never rethink.

The thought of the US starting a shooting war with a country with maybe 240 nukes and maybe 20 missiles capable of hitting the US continent is just not plausible.  The thought that China would risk a war with a country that can remove every city in China from the map with about 3% of its current inventory is a fantasy.

So China will continue to push around non-nuclear armed countries, the US will support its allies and economic interests with diplomatic and economic tools and the various interests will glare at each other and continue to warn of "dire consequences" if their claims are not respected.

But a shooting war between the two largest and most closely tied economies there have ever been? I think its more likely I will look out the window and see the star of Tron Legacy going through my garbage bin.

05 June 2014

God created Crimea to train the faithful

I've been re-reading Dune for the first time in 20 years.  Mostly for parenting tips - I'm hoping to raise a Fremen daughter.

It suddenly occurred to me "this whole book is an allegory, for middle eastern politics in the 1960s.  The Spice is standing in for oil, the Harkonnens are the Soviets, the Atreides are the US and Arrakis is the entire middle east".

Why had no-one else seen this?   

Turns out, I was literally the last person on Earth to achieve this insight.

Anyway, the point I'm trying to make is as true today as in 1965 - the Spice (oil) must flow.  If you examine recent frank discussions between Russia and the US (or Gazprom and Exxon if you prefer) in respect of Ukraine, you can go a fair way to explaining them through the lens of oil rights.

The Russians moved with extreme haste to recognize Crimea's vote for independence and annex it into the old motherland, but balked at doing the same for vast stretches of eastern Ukraine despite a very similar vote.  

I wondered why.  On paper, both would be worthy additions to the Rodina. 

Crimea is located right in the middle of the Black Sea. European powers have fought for the last dozen generations to control the port of Sevastopol.  Its hard to overstate its strategic importance.

On the other hand, Eastern Ukraine contains most of the coal and ferrous ore deposits in the country and the largest part of its heavy industry. The annual steel output is measured in tens of millions of tonnes. Its also the path for the massive LNG pipeline which feeds Siberian product into the western European network.
So, I was mildly surprised that the Russians went hell for leather to grab Crimea but seem content to leave everything east of Dnepropetrovsk in the hands of the Ukrainians. 

But if you define your geo-political interests purely on the basis of crude oil, the anomaly resolves.  

Crimea might not have any oil, but its exclusive economic zone stretches out up to 200 miles across the Black Sea.  And that sea is black with oil.  No-one seems to know how much, but enough to pique the interests of ExxonMobil, Royal Dutch Shell and Petrom.  So lets assume a very large amount.

In contrast, the mineral riches of the east don't contain much oil and, while the LNG might go through the eastern part of the country, the big oil pipe doesn't, it goes into Ukraine from Belarus west of Kiev.

So taking the east doesn't improve Russia's grip on the oil supply.

Whatever the value of the onshore assets in Eastern Ukraine, it could never hope to match the offshore treasure around Crimea.  

The spice must flow and the Russians decided it would flow east not west.

31 May 2014

Rational skepticism

I decided to start writing again.

I have recently become a member of the stock owning class.

With the birth of my daughter I decided to save for her future university education. While there is always the chance I will become Prime Minister and she will be offered a secret $60,000 scholarship, I think its better to hedge her bets by starting a university fund.

Now the pot has grown large enough, I've invested it in stocks.

The amount is tiny, the risk minuscule and my level of research in the relevant companies infinitesimal  – naturally I watch them like a hawk, becoming enraged when my holdings in Wesfarmers fall by 76 cents and euphoric when Woolworths investment grows by $1.20.

I've deepened my involvement in this penny ante game by reading blogs, website and columnists who all claim searing insights into the futures of listed companies they have never worked for run by managers and directors they have never spoken to.

Turns out their predictive ability is no better than mine despite the no doubt countless hours spent pouring over information.

So my issue is this: what is the rational level of skepticism in “expert opinion”?

Obviously throwing out all expert views and trusting to blind faith is foolish. I still hold sacred the right to treat with derision and contempt vaccine skeptics, holocaust revisionists and climate change deniers.

So where is the line?

Perhaps we can start with the proposition that skepticism of established data puts you on shaky ground. So we can be skeptical whether a new “pandemic” will kill all human life on the planet (though hopefully it will still get Gwyneth Paltrow), but only an idiot would argue that vaccines cause autism.

Next rule, its dangerous to trust the opinion of a person whose salary depends on them holding that opinion. So when my local bishop told me in school that the Catholic church would never cover for a Marist brother involved in child abuse, I should really have been a little less trusting.

Third rule, predicting based on an ideological stand point should be done with care.  It exposes you to the risk of confirmation bias. 

Last rule, real world systems are complex. Lots of things both visible and hidden can skew predictions. Hard simple rules don't usually have great predictive ability beyond the obvious.

With this in mind, I vow to be less firm in my future predictions on this blog and more open to opposing arguments in my every day life.

I also intend to keep my stock buys to safe blue chips.

I'm also going to try to write at least once a fortnight, whether anyone reads it or not.

As always, your comments are appreciated...even the trolling.