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June 2018 A. Gary Shilling's INSIGHT 1

INSIGHT (ISSN 0899-6393) is published monthly by A. Gary Shilling & Co., Inc., 500 MorrisAvenue, Springfield NJ 07081. President: A. Gary Shilling. Editor and Publisher: Fred T. Rossi.Economic Research Associate: Chris Skyba. Telephone: 973-467-0070. Fax: 973-467-1943. E-mail:[email protected]. Web: www.agaryshilling.com. Twitter: @agaryshilling. © 2018 All rightsreserved.

In This Issue

December 2018

Volume XXXIV, Number 12 December 2018

Many commodity prices have fallen this year, and the CRB index is down 9.4%from its January 26 peak (Chart 1). According to Thomson Reuters, the index’ssponsor, the 19 commodities in their broad index are weighted by requisiteliquidity as demonstrated by suitable levels of open interest, trading volumes, bid/ask spreads; global economic significance such as consumption production levelsand trends; commodity sector correlations, relationships and properties; andcontribution to strategic properties commonly associated with commodities suchas an asset class, for example, inflation protection, diversification to traditionalfinancial assets, etc.

Special FactorsNot surprisingly, crude oil has the biggest weight at 23% (Chart 2, page 2), andpetroleum’s price, like many other specific commodities, is heavily influenced byspecific factors. Natural gas has spiked recently due to forecasts of colderweather and relatively low inventories going into winter (Chart 3, page 2).Soybeans, like any commodity, are fungible, so if China is buying beans from

Falling Commodities: 10 Reasons Why1 Falling Commodities: 10 ReasonsWhy Commodity prices are falling withthe broad-based CRB index down 15%from its January 26 top. We believe theywill continue to be weak for 10 distinctreasons.1. Global economic growth is slowing anda worldwide recession may be inprospect.2. The strengthening dollar curbscommodity demand abroad, especially inemerging markets.3. Commodity producers are prone toexcess capacity.4. Slowing growth in China reducescommodity demand.5. Spending on goods grows slower thanon services as economies expand.6. Globalization disrupts economic growth,to the detriment of commodities.7. Ongoing trade wars curtail economicgrowth and commodity use.8. Excess inventories will continue todepress commodity prices.9. Peak oil demand, not peak supply, willpressure prices.10. Real commodity prices fall steadily inthe long run due to efficiency, substitutesand human ingenuity.

28 Investment Themes30 Summing Up

31 Climate Change: A Look FromBoth Sides Hurricanes, severe winterstorms, wildfires in the West andEuropean droughts, along with theissuance of several new reports, haveraised fresh concerns about climatechange and the threat it poses to theplanet.One side claims humans are playing a majorrole in rising global temperatures and urgesimmediate action to stave off what they feelwill be a catastrophe affecting all aspects oflife. The other side thinks it’s simply part ofa natural climatic cycle that’s not as dire asis being proclaimed and, in any event, favorsfree-market solutions to any problems thatmight arise.

52 Commentary: Rudolph vs. Mr. Rogers

CHART 1Reuters/Jefferies CRB Index

Source: Thomson Reuters

Last Point 11/30/18: 181.7

Jan-18 Mar-18 May-18 Aug-18 Oct-18175

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Economic Research and Investment Strategy

A. Gary Shilling’s INSIGHT

2 A. Gary Shilling's INSIGHT December 2018

[email protected] @agaryshilling

Brazil vs. the U.S., American soybeansshould replace those in markets thatearlier bought Brazilian beans. Thatreplacement would only work, however,if supply and demand for soybeans werein balance, but the USDA estimates thatU.S. inventories at the end of the currentcrop year are 955 million bushels, upfrom 425 million bushels a year earlier(Chart 4, opposite page) while world soybeanstocks are 112.1 million metric tonscompared to 99.7 million metric tons.

Soybean prices have slumped as thetrade war-spawned tariff leap on Chineseimports from the U.S. have slashedexports of beans to America’s biggestforeign customer (Chart 3). Crude oilprices climbed earlier this year, but thennosedived in the face of U.S. sanctionsagainst Iran, a major exporter, and surgingU.S. output (Chart 5, opposite page).

The Forest vs. The TreesNevertheless, concentrating on the forestinstead of the individual trees, we see 10reasons why commodity prices are weak,many of which are likely to persist foryears. Perhaps the best gauge of theforest is copper. It’s sometimes calledthe commodity with a Ph.D. in economicsbecause it’s used in almost everymanufactured good produced fromplumbing fixtures to electric motors to

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FORWARD LOOKING STATEMENTS AND OPINION: Certain statements contained in this presentation may be forward-looking statements that, by their nature,involve a number of risks, uncertainties and assumptions that could cause actual results or events to differ materially, potentially in an adverse manner, from those expressedor implied herein. Forward-looking statements contained in this presentation that reference past trends or activities should not be taken as a representation that suchtrends or activities will necessarily continue in the future. AGS undertakes no obligation to update or revise any forward—looking statements, whether as a result ofnew information, future events or otherwise. Opinions offered herein constitute the judgment of AGS, as of the date of this presentation, and are subject to change.You should not place undue reliance on forward-looking statements or opinions, as each is based on assumptions, all of which are difficult to predict and many of whichare beyond the control of AGS. AGS believes that the information provided herein is reliable; however, we do not warrant its accuracy or completeness.

The information contained in this document is current as of the date shown.. Additional information regarding the analysis shown is available upon request, except wherethe proprietary nature precludes such dissemination.

Information presented herein (including market data and statistical information) has been obtained from various sources which AGS considers to be reliable. However,we make no representation as to, and accept no responsibility or liability whatsoever for, the accuracy or completeness of such information. All projections, valuationsand statistical analyses are provided to assist the recipient in the evaluation of the matters described herein.

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CHART 2Thomson Reuters Core Commodity CRB Index Weights


CHART 3Commodity Futures Prices


Last Points 11/30/18: soybeans $8.95; natural gas $4.61$ per contract

Jan-18 Mar-18 May-18 Jul-18 Oct-188.0

8.5

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2.5

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Soybeans - left axis

Natural Gas - right axis

December 2018 A. Gary Shilling's INSIGHT 3


autos to computers to machinery todoor locks to clocks. Like anycommodity, copper can be subject totemporary supply constraints, but itremains an excellent measure of globalindustrial production. And copper pricesare falling this year (Chart 6).

Furthermore, copper is free to reflectfundamental economic forces since it isfree of cartels or other restraints on thesupply or demand side. Oil prices, ofcourse, are somewhat subject to thesupply restraints imposed by OPEC,which now includes Russia, in essence(Chart 5). Sugar prices in the U.S. arehigher than abroad because of theAmerican quota on sugar imports (Chart7, page 4). The $0.12 per pound premiumfor American sugar is designed to supportsugar cane growers in Louisiana, Florida,Hawaii and Texas and sugar beet farmersin North Dakota, Minnesota, Idaho andMichigan. The quotas also confine theU.S. market to American “friends” suchas the Philippines but not to “non-friends”like Cuba.

1. Slowing global economic growth and arecession may be in prospect. Asaggregate demand weakens the usage ofmost commodities worldwide andproducers seldom moderate supply fastenough to match the weakness in demand,commodity prices fall. Chart 8 (page 4)shows this consistent pattern ofcommodity prices in relation to post-World War II recessions. And note thatwhen the economy is weakening,aggregate measures of activity tend to bereduced in subsequent revisions. Theinitially-reported growth for Septemberin U.S. payroll employment, retail salesand industrial production were all cutupon revision as additional data reflectsfurther weakness.

The German and Japanese economiesboth shrank in the third quarter andChinese growth fell to its lowest rate ina decade. World trade volume, whichnormally grows at a faster rate thaneconomies overall, saw a sharp decline

CHART 4U.S. Soybean Inventory

Source: Bloomberg and Department of Agriculture

Last Point 11/18: 955.0millions of bushels

2007 2008 2010 2012 2013 2015 2017 20180

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CHART 6Copper Inventories and Futures Price

Source: Bloomberg and CME Group

Last Points: 10/18 inventories 157,434; 11/30/18 price $2.78

2007 2008 2009 2011 2012 2013 2015 20160

50000

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Comex Copper Inventories (metric tons) - left axis

Copper Spot Price ($/pound) - right axis

CHART 5Brent and WTI Crude Oil Prices


Last Points 11/30/18: Brent $58.71; WTI $50.93$ per barrel; nearest futures contracts

Jan-18 Mar-18 May-18 Jul-18 Oct-1850

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Brent Crude Oil

WTI Crude Oil



in its rate of advance in the first half ofthis year (Chart 9).

Our October 2018 Insight article,“Looming Recession?,” explored themany reasons that a U.S. and, indeed, aglobal recession may commence in thenext year or so. Stocks are fallingworldwide (Chart 10, opposite page) as theyalways do ahead of recessions (Chart 11,opposite page). This in part is due toongoing central bank interest rate hikes.

The Fed is raising its federal funds policyrate, and as we’ve observed many timesin past reports, when it did so 13 timessince World War II to cool what it saw asan overheating economy, it onlysucceeded in effecting a soft landingonce, in the mid-1990s. The other 12rate-raising campaigns resulted inrecessions. And in all those cases, theFed used interest rates as its policyinstrument. Now, it is also reducing its$4.1 trillion portfolio of assets with noprevious experience in using this measure.

In addition, the Treasury yield curve, asmeasured by the spread between 2-yearand 10-year Treasury notes, will probablyinvert with another Fed rate hike or two,with shorter rates above longer-termyields (Chart 12, opposite page). In thepast, inversion has always been associatedwith a recession, no exceptions. Thewidening of the yield curve between junkbonds and investment-grade corporateissues (Chart 13, page 6) is also normalahead of a recession as investors worryabout the ability of marginal companiesto meet their obligations.

Home sales are heavily leveragedfinancially by borrowing and, therefore,very sensitive to rising mortgage rates.So this is the first economic sector to fallwhen the Fed raises rates ahead of arecession (Chart 14, page 6). The ongoingrise in 30-year fixed-rate mortgages has,with the usual delay, begun to push downthe sales of existing as well as new

CHART 7Sugar Futures Prices

Source: Bloomberg

Last Points 11/30/18: domestic $0.25; world $0.13cents per pound

Jan-18 Mar-18 May-18 Jul-18 Oct-180.10

0.12

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Domestic No. 16

World No. 11

CHART 8Bloomberg Commodity Index and Industrial Production Index

Source: Bloomberg and Federal Reserve

Last Points 11/18: commodity index 82.56; indus. prod. 109.07

1960 1968 1976 1985 1993 2001 2010 20180

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Bloomberg Commodity Index - left axis

Industrial Production Index (2012=100) - right axis

CHART 9World Trade Volume

Source: World Trade Organization and The Wall Street Journal

Last Point 2Q 2018: 0.6%quarter/quarter % change

15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 18Q1-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

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houses, which nosedived 8.9% in Octoberfrom September an 12% from a yearearlier (Chart 15, page 6).

Flagging ProfitsCorporate profits’ share of nationalincome normally falls ahead of arecession as strains on labor marketsincrease the share going to laborcompensation (Chart 16, page 7). U.S.multinational corporations are being hurtby slowing economic growth abroad andthe strong dollar. Profits earned abroadrose 7% in the third quarter, down froma 13.7% growth in the second and 15.6%in the first quarter. Notice the negativecorrelation between changes in the dollarand the S&P 500 (Chart 17, page 7).

Currently, with job openings exceedingthe number of unemployed (Chart 18,page 7), employees are confident enoughto quit their existing jobs (Chart 19, page8) and strike (Chart 20, page 8). Theearlier rise in stock prices also buoyedconsumer confidence (Chart 21, page 8),which is high at business cycle peaks.Another sign of an impending top is highconsumer expectations of higher stockprices in one year. Also, households areconfident enough to increase theirspending faster than their incomes rise,resulting in a declining saving rate (Chart22, page 9).

Investors may be taking note of theunsustainability of consumer spending,especially going into the crucial Christmasselling season. Despite rising salesreported by major U.S. retail chains forthe third quarter, investors have beendumping their shares. In some cases,their profits are up from a year earlieronly because of the cut in the maximumcorporate tax rate from 35% to 21%.

Also, U.S. retailers speeded up importsfrom China to get ahead of the new U.S.import tariffs. The result is highinventories that may prove troublesomeand may require price slashes to clearout. One estimate is that the already-

CHART 12Treasury Yields and Spread

Source: Federal Reserve

Last Points 11/30/18: spread 0.21%; 2-yr. 2.80%; 10-yr. 3.01%

1976 1984 1991 1999 2007 2014-4%

-2%

0%

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Spread

2yr Yield

10yr Yield

CHART 10Global Equity Indices

Source: Bloomberg

Last Points 11/30/18: MSCI EM 994.7; MSCI world 1,806; S&P 2,760

Jan-18 Mar-18 Jun-18 Aug-18 Oct-18900

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MSCI Emerging Markets Stock Index - left axis

MSCI World Index Excluding United States - right axis

S&P 500 Index - far right axis

CHART 11S&P 500 Index

Source: Bloomberg

Last Point 11/30/18: 3.44logarithm base 10

1950 1958 1966 1975 1983 1991 2000 2008 20161.0

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imposed 10% tariff on imports fromChina will cut retailers’ earnings in half in2019, and those tariffs are scheduled torise to 25% in January. Meanwhile, U.S.retailers are squeezing suppliers andslashing costs since they fear consumers,accustomed to low inflation, won't acceptcost pass-throughs.

Globally, the Organization for EconomicCooperation and Development’s totalindex of leading indicators is falling (Chart23, page 9). This index contains economicharbingers from 33 major economiesand six non-member economies, andfalls in anticipation of recessions.

Commodity prices are also vulnerable torecessions (Chart 8). Sometimes theyfall before the peak of business, as wasthe case in the 1981-1982 and 1990-1991 recessions, and sometimescoincident with the business downturn,as in the 2001 business slump.Commodities have also peaked after therecession started, as in the 1973-1975recession, the 1980 business decline andthe 2007-2009 Great Recession. So thetiming of commodity index price declinesand aggregate business drops areuncertain, but falling commodity pricesare a clear warning signal.

2. The dollar’s strength curbs emerging-market demand for commodities. As weexplored in “Debt and the Dollar AreSinking Emerging Markets” (October2018 Insight), emerging markets feastedon cheap and readily-available debt afterthe Great Recession. As a percentage ofGDP, their government, individual andbusiness debt leaped from 110% in 2007to 212% in the fourth quarter of 2017(Chart 24, page 9).

Foreign investors, zealous for returns ina low interest rate world, were eager tolend to emerging markets. PresidentRecep Erdogan of Turkey saw this as aneasy way to finance new infrastructure,including shopping centers, and ranTurkey’s foreign currency-denominated

CHART 13Corporate Bond Spreads

Source: ICE Bank of America Merrill Lynch

Last Points 11/30/18: high yield BBB 2.36%; BBB-AAA 1.06%

Jan-16 May-16 Oct-16 Feb-17 Jul-17 Nov-17 Apr-18 Sep-180%

1%

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Junk Bond - U.S. Corporate BBB Spread

U.S. Corporate BBB - U.S. Corporate AAA Spread

CHART 14U.S. Housing Starts

Source: Census Bureau

Last Points 10/18: single 0.87; multi 0.36seasonally-adjusted annual rates; million units

1964 1972 1980 1989 1997 2005 20140.2

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Single-Family Units - left axis

Multi-Family Units - right axis

CHART 15Home Sales and 30-Year Fixed Mortgage Rate

Source: Bloomberg and National Association of Realtors

Last Points: 11/18 rate 4.66%; 10/18 existing sales 5.22; new sales 0.54seasonally-adjusted annual rates; million units

2007 2008 2010 2012 2013 2015 2017 20183.0%

3.5%

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30-year Mortgage Rate - left axis

Existing Home Sales - right axis

New Home Sales - far right axis



debt to 70% of GDP in 2017 (Chart 25,page 10). But Turkey was not alone.Hungary’s foreign currency-denominated debt reached 64% of GDPand 54% for Argentina. The U.S. dollarportion of Turkey’s debt jumped from13% in 2008 to 23% in 2017 (Chart 26,page 10).

The earlier decline in the greenbackmade those foreign debts increasinglycheaper to service in local emerging-market currencies but now the U.S.dollar index vs. seven other majorcurrencies is rising with emerging-marketcurrencies now falling against the buck(Chart 27, page 10). Now, paying interestand principal on those dollar-denominated debts is taking more andmore emerging-market currency.

This problem is enhanced by emergingmarkets with current-account deficits(Chart 28, page 11). They must alreadyimport foreign capital to fill those gaps,which rise as worried foreign investorsflee and are attracted by Fed-led risinginterest rates in the U.S. Many, such asTurkey, are digging deeply into theirforeign-currency reserves to fund theoutflows (Chart 29, page 11).

Commodity ImportsIn addition, the commodity imports ofemerging markets are rising in cost sincealmost all major commodities are tradedin dollars. Of 45 important commodities,42 are priced in greenbacks (Chart 30,page 11). With the 27% plummet in theTurkish lira so far this year, Brent crudeoil, the global benchmark, in lira is up58% vs. 6% in dollars (Chart 31, page12). Falling emerging-market currenciesagainst the dollar make commoditiesincreasingly expensive for emergingmarkets and reduce demand.

And emerging-market problems will onlyintensify if the buck’s long slide since1985 is decisively reversed, as we believe(Chart 32, page 12). The greenback fell52% from its March 1985 top to its July

CHART 18Number of Unemployed and Job Openings

Source: Bureau of Labor Statistics

Last Points: 10/18 unemployed 6.08; 9/18 job openings 7.01millions

2001 2005 2009 2013 20172

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Unemployed

Job Openings

CHART 16Corporate Profits and Employee Compensation

Source: Bureau of Economic Analysis

Last Points 3Q 2018: empl. comp. 61.7%; corp. profits 13.1%as a % of national income

1947-I 1959-III 1972-I 1984-III 1997-I 2009-III 58%

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Compensation of Employees - left axis

Corp. Profits with IVA and CCAdj - right axis

CHART 17U.S. Dollar and S&P 500 Index


Last Points 11/18: $4.5%; S&P 500 4.1%year/year % change

2007 2008 2010 2012 2013 2015 2017 2018-15%

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U.S. Dollar Index - left axis

S&P 500 Index - right axis



2011 low and has since risen 32.9%. Butit’s still 33.8% below that earlier peakand likely to continue to move toward it.

The dollar is a global safe haven in a seaof populist political upheaval, trade warsand worldwide uncertainty. Interestingly,the buck benefits even if Americaninitiates the trouble. Witness its rally asTrump intensifies the trade war withChina.

Dollar ShortageFurthermore, there is a dollar shortageabroad that enhances its value. And theshortage will grow as the Fed steps up itssale of assets and thereby sucksgreenbacks out of the financial system.

In addition, Trump will probably win thetrade war with China. As we’ve discussedin past Insights, there are ample suppliesof goods in the world so the buyer—theU.S.—has the upper hand over theseller—China. Besides, where, except toAmerica, could China sell all thoseconsumer goods? Also, Chinese growthis slowing (Chart 33, page 12) as herexport growth slows (Chart 34, page 13)and the infrastructure spending she relieson to replace exports spurs ghost cities,excess capacity and leaping debt (Chart35, page 13).

China will probably steal less U.S.technology, demand less technologytransfers as the price of American firmsdoing business there and import moreU.S. goods and services. That will reducethe American trade and current-accountdeficits (Chart 36, page 13). Since theannual current-account deficit equalsthe number of dollars the U.S. pumpsinto the rest of the world, $496 billion inthe first quarter at annual rates, theresult will be a shrinkage in the supply ofdollars abroad and higher values inforeign currency terms.

In the long run, the dollar should continueto benefit from being the world’s firstand foremost international currency. As

CHART 20Days of Idleness Due To Labor-Related Worker Stoppages

Source: Bureau of Labor Statistics and The Wall Street Journal

Last Point 3Q 2018: 2.15millions of days

2003 2005 2007 2009 2011 2013 2015 20170.0

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CHART 19Quit Rate


Last Point 9/18: 2.4%quits as a % of workforce

2000 2003 2005 2008 2010 2013 2015 20181.2%

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CHART 21Measures of Consumer Attitudes

Source: University of Michigan and The Conference Board

Last Points 11/18: Michigan 97.5; Conf. Bd. 135.7

1952 1961 1969 1977 1986 1994 2002 201120

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University of Michigan Consumer Sentiment

The Conference Board Consumer Confidence



we first discussed in the 2013 book,Currencies After The Crash, our researchgoing back to ancient times revealed sixcharacteristics of a leading currency, allof which the dollar fulfills and will nodoubt continue to do so. Our October2018 Insight updated this analysis, whichappears increasingly valid.

1. The U.S. has the highest GDP percapita with $59,532 in 2017 comparedto $36,869 in the eurozone and only$8,827 in China (Chart 37, page 14).Also, the American economy has grownfaster than other major economies inEurope and Japan since the GreatRecession.

2. The American economy is the largestby far with $19,291 billion GDP in 2017compared to $12,589 billion in theeurozone and $12,238 billion in China(Chart 37).

3. The depth and breadth of U.S.financial markets is unexcelled, makingthem and the dollar attractive toforeigners. America’s stock marketcapitalization last year was $32.12 trillion,far outdistancing the eurozone’s $11.03trillion and China’s $8.72 trillion (Chart38, page 14). And American sovereigndebt, heavily used by foreigners as ashare of assets, was $15.3 trillion in2017, double heavily-indebted Japan’s$7.6 trillion (Chart 39, page 14).

4. America has largely free and openeconomy and markets, making it anattractive place to invest, especiallycompared to China with tight controlsand unpredictable policies. The WorldBank ranks the U.S. sixth out of 189countries for business-friendlyregulations. The U.K. is seventh,Germany 20th, Japan 34th and China adistant 78th (Chart 40, page 14).

5. There’s no substitute of any size forthe greenback on the global stage. Theeuro is curtailed by continuing economicand financial turmoil in the eurozone

CHART 23OECD Total Leading Indicators

Source: Organization for Economic Cooperation and Development and Bloomberg

Last Point 9/18: 99.50

Jan-16 Jun-16 Nov-16 Apr-17 Sep-17 Feb-18 Jul-1899.5

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CHART 24Emerging-Market Debt

Source: Bank for International Settlements

Last Points 4Q 2017: $67.6; % of GDP 212.3%includes credit to non-financial sector and general government

2001 2003 2005 2007 2009 2011 2013 2015 20170

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Trillion USD - left axis

As a Percent of GDP - right axis

CHART 22Personal Income, Outlays and Saving Rate


Last Points 10/18: DPI 0.3%; PCE 0.4%; saving rate 6.2%month/month % change

Jan-18 Mar-18 May-18 Jul-18 Sep-18-0.3%

-0.2%

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Real Diposable Personal Income - left axis

Real Personal Consumption Expenditures - left axis

Personal Saving Rate (SAAR) - right axis



and insular Japan doesn’t want the yen tobe a global currency. China lusts forworldwide status for her yuan, but hertight control of that currency repelsforeigners.

6. The U.S. dollar enjoys unprecedentedcredibility with virtually no perceivedrisk of confiscation or devaluation. Also,Trump’s vigorous assertion of economic,financial and military strength, especiallyin his showdown with China, raises thegreenback’s credibility and appeal.

A strengthening greenback not onlymakes economic conditions difficult foremerging markets, it also makescommodities more expensive fordeveloped country buyers. As a result,commodity prices are forced down tothe point that importers can afford tobuy them and equilibrium is re-established.

3. Chronic excess capacity amongcommodity producers. As we discussedin “Sic Transit Gloria Mundi” (March2018 Insight), in many segments ofcommodity production, fixed costs arehigh but variable costs are low. The costof developing a major new copper minecan be $5 billion to $10 billion, consideringall the roads, mining equipment,personnel facilities, overburden removal,etc. But once those expenses arecompleted, the variable costs of mininganother ton of copper ore are small.Canadian oil sands companies can't coverall costs at current low prices, but theyhad huge sunk costs in mining andprocessing bitumin, and marginal costsare low. So they keep producing togenerate cash flow.

As a result, after demand and prices arehigh enough to cover fixed costs, a majorpercentage of additional revenue dropsright to the bottom line. These industryeconomics also encourage investmentand expansion when profits are lush,especially since producers don’t tend tobe aware of the existence of commodity

CHART 25Foreign Currency-Denominated Emerging-Market Debt

Source: The Wall Street Journal

as a % of GDP70%

64%54%

52%50%

41%39%

35%33%

32%31%

29%27%

25%24%

21%20%

15%14%

10% 20% 30% 40% 50% 60% 70%

TurkeyHungary

ArgentinaPoland

ChileS. Korea

IsraelMalaysia

Czech. Rep. Colombia

S. AfricaMexico

BrazilRussia

IndonesiaSaudi Arabia

ThailandIndia

China

TurkeyHungary

ArgentinaPoland

ChileSouth Korea

IsraelMalaysia

Czech Rep.Colombia

South AfricaMexicoBrazil

RussiaIndonesia

Saudi ArabiaThailand

IndiaChina

CHART 27U.S. Dollar Index and MSCI Emerging-Markets Currency Index

Last Points 11/30/18: $ index 97.27; EM index 1,607

Source: Bloomberg


89

90

91

92

93

94

95

96

97

98

1560

1580

1600

1620

1640

1660

1680

1700

1720

1740

U.S. Dollar Index - left axis

MSCI Emerging Markets Currency Index - right axis

CHART 26Emerging-Market Exposure to U.S. Dollar Appreciation

Source: NBF Economics and Strategy, Bank for International Settlements and Int'l Monetary Fund

US$-denominated credit to non-bank borrowers as a % of GDP

0% 5% 10% 15% 20% 25%

Turkey

Mexico

Argentina

Indonesia

Saudi Arabia

Russia

Malaysia

S. Africa

Brazil

China

India

2008

2017

TurkeyMexico

ArgentinaIndonesia

Saudi ArabiaRussia

MalaysiaSouth Africa

BrazilChinaIndia



cycles and the reality that high demandand prices don’t last indefinitely. In fact,heavy investment and the resulting excesscapacity, followed by declining prices,are key aspects of those cycles.

Commodity producers worldwide wereenergized when China joined the WorldTrade Organization at the end of 2001.At that point, many reasoned that withexpanded access to global markets forher manufactured goods, Chinesedemand for commodities would bealmost insatiable. She was buying morethan 40% of the global output of tin,zinc, copper and other nonferrous metalsa well as immense quantities of iron oreand coal (Chart 41, page 15). Almost oncue, commodity prices leaped, beginningin January 2002 (Chart 42, page 15).Those developments spurred hugeinvestments in commodity productionaround the world.

What many commodity producers failedto realize, however, was that China wasnot adding much to net global demandfor commodities but rather absorbingmore of the world ’s total asmanufacturing shifted there from NorthAmerica and Europe. Notice theresulting devastating effects on U.S.manufacturing employment (Chart 43,page 15) and share of GDP (Chart 44,page 16). Globalization was in full force.

Commodity prices jumped to their peakin early July 2008, but then collapsedwith the global Great Recession (Chart42). The post-recession rebound lasteduntil April 2011 when the commodityprice slide resumed. And that declinecommenced before the drop in crude oilprices commenced in June 2014. Thequick trip from feast to famine leftmany commodity producers, small andlarge, in sore shape with threatenedbankruptcies. Capital spending budgetswere axed and dividends slashed oreliminated.

CHART 28Current-Account Balances

Source: Bloomberg

Last Points 2Q 2018: MX -1.6%; AR -5.3%; BR -0.7%; SA -3.2%; TR -6.5%; IN -2.4%as a % of GDP

2000 2002 2005 2007 2010 2012 2015 2017-10

-8

-6

-4

-2

0

2

4

6

8

10

12

-10

-8

-6

-4

-2

0

2

4

6

8

10

12

Mexico

Argentina

Brazil

South Africa

Turkey

Indonesia

CHART 29Turkish Foreign-Exchange Reserves

Source: Bloomberg and Central Bank of Turkey

Last Point 11/18: $71.01$ billion

Jan-13 Oct-13 Jul-14 Apr-15 Jan-16 Nov-16 Aug-17 May-1860

70

80

90

100

110

120

60

70

80

90

100

110

120

CHART 30Commodities Traded by Currency

Source: NYMEX, ICE, CME Group, London Metals Exchange and Wikipedia

U.S. Dollar: Corn, Oats, Rough Rice, Soybeans, Rapeseed, Soybean Meal,Soybean Oil, Wheat, Milk, Cocoa, Coffee C, Cotton No. 2, Sugar No. 11,Froz. Concentrated Orange Juice, Adzuki Bean, Lean Hogs, Live Cattle,Feeder Cattle, WTI Crude Oil, Brent Crude, Ethanol, Natural Gas, HeatingOil, Gulf Coast Gasoline, Gasoline, Propane, Purified Terephthalic Acid(PTA), Copper, Lead, Zinc, Tin, Aluminum, Aluminum Alloy, Nickel,Cobalt, Molybdenum, Recycled Steel, Gold, Platinum, Palladium, Silver andRubber

Malaysian Ringgit: Palm Oil

Australian Dollar: Wool

Russian Ruble: Amber



Commodity prices have recovered, butonly 2.4% of the fall from the July 2008peak, and the CRB index still remainsbelow its October 2000 level (Chart 42).Corrected for producer price inflation,that index has fallen 39.2% over the 18intervening years. So you might thinkthat major commodity producers wouldhang on only to their profits and usingthem to rebuild balance sheets whilerestraining capital spending.

Not so! They returned to their old ways,apparently believing that the rebound incommodity demand and prices wouldlast indefinitely. Booming cash flowgave them plenty of room to make moreacquisitions and return more cash toinvestors, as shareholders demanded.

4. Slowing growth in China is reducingdemand for commodities. As explainedearlier, much of China’s earlier growth(Chart 33) was not added net new globaldemand but replacing manufacturing thatwas previously done in North Americaand Europe. Her switch to infrastructurespending when export growth slowed(Chart 34) resulted in troubling excesscapacity, ghost cities and the leap in totaldebt (Chart 35).

Beijing seems well aware that withrelatively slow economic growth in theU.S. and elsewhere in the West, as well asTrump’s determination to reduce China’shuge and growing trade surplus with theU.S. (Chart 45, page 16), her growth-through-export game is over.

So Chinese leaders are emphasizingdomestic-led growth, based on consumerspending. This is a difficult and time-consuming effort. Chinese householdssaved a huge 30% of their after-taxincome compared to 6.7% in the U.S. in2017 (Chart 46, page 16). That Confuciansociety emphasizes taking care of one’sfamily, financially and otherwise. Also,Chinese must save to pay for theirchildren’s education since there is littlegovernment support, and high saving is

CHART 31Brent Crude Oil and Turkish Lira per Barrel

Source: Bloomberg

Last Points 11/30/18: Brent 109.5; lira 163.9Jan. 1, 2017=100

Jan-17 May-17 Oct-17 Feb-18 Jul-1860

80

100

120

140

160

180

200

220

240

260

280

60

80

100

120

140

160

180

200

220

240

260

280

Brent Crude Oil ($/barrel)

Turkish Lira Per Barrel

CHART 32Dollar Index

Source: Federal Reserve

Last Point 11/18: 91.44vs. major currencies

1973 1981 1989 1998 2006 201460

70

80

90

100

110

120

130

140

150

60

70

80

90

100

110

120

130

140

150

CHART 33Chinese Real GDP

Source: Bloomberg and Chinese National Bureau of Statistics

Last Point 3Q 2018: 6.5%year/year % change

2007 2009 2011 2013 2015 20174%

5%

6%

7%

8%

9%

10%

11%

12%

4%

5%

6%

7%

8%

9%

10%

11%

12%



needed to cover health and retirementneeds since the equivalent of SocialSecurity old-age pensions as well asMedicare and Medicaid are onlybeginning to be developed. In October,Chinese consumer spending hit its slowestgrowth rate in five months.

Furthermore, 6.8% of Chineseconsumer spending is on services thatuse much fewer commodities to producethan goods. In contrast, goods constitutealmost all of Chinese exports andinfrastructure spending. Growth inChinese investment in fixed assets hasdropped from over 30% annual rates in2009 when Beijing pursued massivespending in reaction to the GreatRecession to just 5.7% in October (Chart47, page 17).

China’s growth will also be limited infuture years as she approaches middle-income status—the “middle incometrap.” From the supply side, she grew byputting unemployed and underemployedpeople to work, moving many from thehinterland to coastal cities. Furthermore,China promoted productivity byemulating Western technology as well asstealing it and forcing technology transfersas the gateway for Western firms doingbusiness in China, as noted earlier.

But China is catching up and will, infuture years, rise to the point of SouthKorea, which also used Westerntechnology to grow in earlier years butnow has reached the level that rapidgrowth is no longer possible. Notice(Chart 48, page 17) that between 1970and 2001, real GDP there rose an average8.7% per year but has subsequentlycooled to a 3.8% rate.

Chinese growth will also be constrainedin future years by her declining working-age population, a result of her earlier onechild-per-couple policy that is leadingthe 15-to-64 year-old age group to fallfrom 1 billion in 2015 to 717 million in2060 (Chart 49, page 17).

CHART 34Chinese Exports

Source: China General Administration of Customs

Last Point 10/18: 15.6%year/year % change

2007 2008 2010 2012 2013 2015 2017 2018-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

CHART 35Chinese Total Debt as a Share of GDP

Source: Bloomberg

Last Point 2017: 265.9%includes corporate, household, government and bank debt

2004 2006 2008 2010 2012 2014 2016140%

160%

180%

200%

220%

240%

260%

280%

140%

160%

180%

200%

220%

240%

260%

280%

CHART 36U.S. International Trade


Last Points: 3Q 2018 trade bal. -$646.5; 2Q 2018 curr. acct. bal. -$405.8seasonally-adjusted annual rate; $ billion

2007 2009 2011 2013 2015 2017-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

-800

-700

-600

-500

-400

-300

-200

-100

0

100

200

Trade Balance

Current Account Balance



5. Spending on goods grows slower thanservices as economies expand, to thedetriment of commodity consumption.Sure, medical services involve lab andoffice equipment and education involvescomputers, but per dollar of output,services are much less commodity-intensive than autos and appliances.

You can put only so many cars in yourdriveway and only drive one at a time,but spending on services such asrecreation and travel, medical care andeducation is almost limitless. So indeveloped economies such as the U.S., agrowing share of spending is on servicesand a declining portion on goods (Chart50, page 18). It’s also true for developinglands such as China (Chart 51, page 18).

6. Globalization disrupts economic growth to the detriment of commodities. We continue to believe that the most significantworldwide economic event of the last three decades hasbeen globalization—the shift of manufacturing and otherproduction from relatively-high cost North America andEurope to China and other Asian lands. Then those goods,produced with Western technology and cheap Asian labor,have been exported to the West.

This shift devastated manufacturing employment and outputin the U.S. (Charts 43 and 44) and elsewhere. Consequently,real wages in G-7 mature economies have been basically flatfor over a decade (Charts 52 and 53, pages 18 and 19). Thishas made voters “mad as hell” in the words of HowardBeale in the old movie “Network.”The result is the populism that hasthrown out centrist politicians andinstalled governments on the far rightand the extreme left.

Examples are Brexit in the U.K. twoyears ago where voters rebelledagainst EU bureaucrats as well asopen immigration of low-incomeEastern Europeans, the election ofleftist Justin Trudeau as CanadianPrime Minister replacingConservative Stephen Harper, themore recent election of Italian PrimeMinister Giuseppe Conti, who issystematically thumbing his nose atEU budget deficit limitations and, of

CHART 372017 GDP, Population and GDP per Capita

Source: World Bank

U.S.Euro areaChinaJapanU.K.India

$19,391$12,589$12,238

$4,872$2,622$2,597

100.0%64.9%63.1%25.1%13.5%13.4%

325.7341.5

1,386.4126.8

66.01,339.2

$59,532$36,869

$8,827$38,428$39,720

$1,940

$ Billion % of U.S.Population(million)

GDP per Capita($)

CHART 38Stock Market Capitalization by Area: 2017 (US$ trillion)

* Includes Athens, Cyprus, Irish, Luxembourg, Nasdaq Nordic and SwissStock Exchanges, Euronext, BME Spanish and Deutsche Borse AG

Source: World Federation of Exchanges

U.S. (Nasdaq and NYSE)Eurozone*China (Shanghai and Shenzhen)JapanLondon Stock Exchange Group

32.1211.03

8.726.224.46

CHART 39Government Net Debt: 2017

Source: International Monetary Fund

U.S.JapanChinaItalyFranceU.K.GermanySpainBrazilMexicoCanadaAustraliaIrelandSwitzerlandSweden

15,322.07,574.46,135.02,229.12,161.02,072.11,568.51,068.3

926.5482.8426.8230.0182.4154.246.4

$ billion

CHART 40Ease of Doing Business Rankings

in 10 largest economies

Source: World Bank

U.S.U.K.CanadaGermanyFranceJapanItalyChinaIndiaBrazil

67

182031344678

100123

Of 189 countries1=Most business-friendly regulations



course, Trump’s election as U.S. presidentin 2016.

Trump appealed to economically-strained voters in the middle of thecountry who believed liberals on theEast and West coasts were ignoring them.He blamed their plight on immigrationand imports, sidestepping the underlyingcause: globalization. But then the loss ofa high-paid job to immigrants and importsis a simple, easy-to-sell concept comparedto explaining the movement of output tomuch lower-cost venues and the resultingcheap imported consumer goods.

Disruptive GlobalizationGlobalization has disrupted Westerneconomies and left many who havefailed to adjust with permanently lowerincomes or out of the labor force. It hasalso enhanced the income polarizationthat has persisted for decades. Notice(Chart 54, page 19) that the share ofAmerican income going to the top 20%continues to rise while the other fourquintiles’ shares fall.

This adds to the “mad as hell” feelings.People don’t seem to mind if others’incomes are growing faster than theirs aslong as their spending power is rising.But not if theirs is falling or flat at best,as has been the case for years for mostAmericans.

The effects of globalization on Americanjob losses have probably largely playedout. About all of the production that canbe moved to Asia economically has been.Any manufacturing that has returned—”reshored”—is robotic and capital-, notlabor-intensive. No one in the U.S. isgoing to open a shoe factory employingthousands of workers. Chart 43 revealsa slight rebound in manufacturing payrollsin this economic expansion. Still, thedisruptive effects of globalization willtake years to be completed, to thedetriment of economic growth andcommodity usage.

CHART 42Reuters/Jefferies CRB Index


Last Point 11/30/18: 181.74

1999 2001 2003 2005 2008 2010 2012 2015 2017100

150

200

250

300

350

400

450

500

100

150

200

250

300

350

400

450

500

CHART 43U.S. Manufacturing Payroll Employment


Last Points 10/18: level 12.79; share 8.5%level and share of total

1947 1955 1963 1972 1980 1988 1997 2005 201311

12

13

14

15

16

17

18

19

20

5%

10%

15%

20%

25%

30%

35%

Level (millions of employees) - left axis

Share of Total Nonfarm Payrolls - right axis

CHART 41China's Share of Global Commodity Consumption

Source: Chinese National Bureau of Statistics, Business Insider,World Bureau of Metal Statistics, World Economic Forum and World Steel Association

2000 vs. 2017

Cement

Nic

kel

Steel

Coal

Copper

Alu

min

ium

PorkZin

c

Iron O

re

Lead0%

10%

20%

30%

40%

50%

60%

70%

80%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2017

2000



Globalization, of course, is highlydeflationary as cheap Asian labor is usedto produce low-cost goods, and laborincomes in Western economies aredepressed. It also has spawned adeflationary atmosphere in which buyersexpect prices to remain stable or fall.And Amazon and other online sellersand smart phones have reinforced theirconvictions by making the lowest pricefor a given product readily available andovernight delivery of online orders almostirresistible. The University of Michigansurvey reveals that consumers expectinflation over the next five years toaverage 0.5 percentage point less thanthey projected before the 2007-2009Great Recession.

As a result, retailers are reluctant tooffset higher labor and supply costs withhigher selling prices even though theresult is lower profit margins, as notedearlier. Retail chains such as TJX, RossStores and Target recently reported thatrising freight and wage costs are eatinginto their gross margins.

7. The ongoing trade wars also curtaileconomic growth and commoditydemand. As noted earlier, we continueto believe that Trump will win his tradewar with China, resulting in more U.S.exports and less tech transfers and theftby that country. Nevertheless, that long-term gain is being preceded by short-term pain.

The uncertainty alone over tariff threatsand counter-threats causes businesses topostpone capital outlays. Furthermore,supply chains are being disrupted by thenew U.S. tariffs and Chinese retaliation.In Asia, computer chips aremanufactured in South Korea, sent toJapan for sub-assembly that are thenshipped to China for final assembly intoTVs or other consumer products.Consequently, many countries have largeshares of their exports linked to globalsupply chains (Chart 55, page 19).

CHART 44U.S. Manufacturing Value Added

Source: Bureau of Economic Analysis, Department of Commerceand National Bureau of Economic Research

Last Point 2Q 2018: 11.4%as a % of GDP

1869 1889 1909 1929 1949 1969 1989 200910%

15%

20%

25%

30%

35%

10%

15%

20%

25%

30%

35%

CHART 45Chinese and U.S. International Trade


Last Points 2017: trade bal. -$335.7; imports $523.7; exports $188.0$ billion; goods and services

2003 2005 2007 2009 2011 2013 2015 2017-400

-300

-200

-100

0

100

200

0

50

100

150

200

250

300

350

400

450

500

550

Trade Balance - left axis

Exports - right axis

Imports - right axis

CHART 46Household Saving Rates

Source: Bureau of Economic Analysis and Organization for Economic Cooperation and Development

Last Points: 2017 U.S. 6.7%; 2015 China 29.9%as a % of GDP

1994 1999 2004 2009 20140%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

30%

35%

China

United States



At the same time, many Americancompanies may appear domestic inorientation and not involved in exportsto China, but depend on intermediategoods from that country. In Trump’sinitial $50 billion first round of tariffs onimports from China, 53% were onintermediate goods and 50% on theimpending $200 billion second round ofimports (Chart 56, page 20).

8. Excess inventories depress commodityprices. When demand weakens,commodity producers, like mostbusinesses, aren’t sure it’s a temporaryor longer-term, serious development. So,with the high costs of shutting down andlater restarting operations, producers tendto keep operations running full tilt. Theresult is excess inventories, a major partof past recessions as output cutbacks arethen needed to run off undesired stocks.Already, inventories are heavy in suchcommodities as copper (Chart 6).

Adding to this normal cyclicalphenomenon are the ongoing tradedisputes that have left many otherproducers such as soybean farmers stuckwith price-depressing inventories (Chart4). Meanwhile, excess steel productionin China, plus U.S. tariffs, has depressedChina steel prices by 20% since mid-yearand China produced over half the world'scrude steel. So as inventories mount,iron ore prices have nosedived (Chart 57,page 20)

Crude oil inventories are depressing pricesin Texas’ Permian Basin due to lack ofpipelines to get the oil out to markets. Asa result, there is a large discount of $15per barrel for benchmark West TexasIntermediate (Chart 58, page 21).Increases in fracked oil in North Dakotaare strained pipeline capacity and willforce producers to rely more on railtransportation.

Similarly, Western Canada Select sells at$21.93 per barrel, a $29 per barreldiscount to U.S. crude at $50.93 per

CHART 47Chinese Investment in Fixed Assets

Source: Bloomberg and Chinese National Bureau of Statistics

Last Point 10/18: 5.7%year/year % change

2007 2008 2009 2010 2012 2013 2014 2015 2017 20180%

5%

10%

15%

20%

25%

30%

35%

0%

5%

10%

15%

20%

25%

30%

35%

CHART 48South Korean Real GDP

Source: Bank of Korea

Last Point 3Q 2018: 2.0%year/year % change

1961 1971 1981 1991 2001 2011-10%

-5%

0%

5%

10%

15%

20%

-10%

-5%

0%

5%

10%

15%

20%

Avg. Growth 1970-2001: 8.7%

Avg. Growth 2002-Present: 3.8%

CHART 49Chinese Working-Age Population

Source: United Nations

15-to-64-year-olds; millions

1990 2000 2010 2020 2030 2040 2050 2060700

750

800

850

900

950

1000

1050

700

750

800

850

900

950

1000

1050Projected



barrel because the lack of pipeline capacityrequires it to be moved by much moreexpensive railroad tank cars or trucks.At the same time, total Canadian oiloutput rose to a record 5.3 million barrelsa day in August, and the global marketneeds more of the heavy crude thatCanada produces as output in Venezuelaand Iran declines. In the past decade,Canadian crude on average has traded$17 per barrel below U.S. prices becauseit is costlier to move and refine intopremium fuels.

The recent surge in U.S. oil production,which is expected to rise another 1.38million barrels a day next year to 12million barrels a day, has pushed upinventories for eight straight weeks, andthey now stand at 442 million barrels,the most in nearly a year (Chart 59, page21). Global supply continues to runabove demand (Chart 60, page 21), andOPEC recently lowered its forecast fordemand growth in 2019 to 1.29 millionbarrels a day from 1.45 million barrels aday in July. Also, the recent federalbudget deal reached by Congress willresult in the sale of 100 million barrels ofoil held in the Strategic PetroleumReserve, out of 665 million barrels,between 2022 and 2027. So price-depressing inventories are likely to remainheavy in future years.

DUCsFurthermore, considerable oil is storedunderground in 8,545 drilled butuncompleted wells (DUCs) that can betapped quickly when transportationbecomes available and price discountsfade (Chart 58). Additional Canadianpipelines are tied up in environmentaldisputes but considerable new pipelinecapacity in Texas will be completed nextyear. Three major pipelines will add acombined 1.8 million barrels a day tocapacity.

That would allow much more PermianBasin crude to be moved to the GulfCoast for export. With the tremendous

CHART 50Personal Consumption of Goods and Services


Last Points 3Q 2018: goods 31.2%; services 68.8%as a % of personal consumption expenditures (PCE)

1947-I 1959-III 1972-I 1984-III 1997-I 2009-III30%

35%

40%

45%

50%

55%

60%

65%

70%

30%

35%

40%

45%

50%

55%

60%

65%

70%

Goods

Services

CHART 51Chinese Value Added by Industry

Source: Chinese National Bureau of Statistics and Bloomberg

Last Points 3Q 2018: agriculture 6.8%; goods 40.4%; services 53.3%as a % of total GDP

1992 1996 2000 2004 2008 2012 20165%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

Agriculture Goods Services

CHART 52Real Annual Wages

Source: Bloomberg and Organization for Economic Cooperation and Development

Last Points 2017: U.S. -0.2%; Japan 0.4%; Canada 0.5%year/year % change

1991 1995 1999 2003 2007 2011 2015-2%

-1%

0%

1%

2%

3%

4%

5%

-2%

-1%

0%

1%

2%

3%

4%

5%

United States Japan Canada



leap in American fracked oil, the U.S. israpidly moving from an oil importer toan oil exporter (Chart 61, page 22). Andgiven the wide spread between WTI andBrent oil prices (Chart 5), U.S. exportswill leap as pipelines from the PermianBasin to the Gulf Coast are completed.The U.S. Energy InformationAdministration predicts that if LNG andother energy sources are included,declining American imports will switchto net exports by 2023, and exportsalready reached 3 million barrels a day inJune. If essentially safe supplies fromCanada and Mexico are included, U.S.crude imports are already close to zero(Chart 62, page 22).

OPEC pumped 32.76 million barrels aday in September, 1.13 million barrels aday more than the market will need inthe first half of 2019. Oil inventories inthe 33 major OECD countries are thehighest in five years.

9. Peak oil supply, not peak demand, willdepress prices. Until recently, there waswidespread conviction that the worldwould soon run out of crude oil. M.King Hubbert (1903-1989), ageophysicist who joined Shell Oil in1947, believed that oil field productionfollowed the classical bell curve, ornormal distribution, and that oil gets

CHART 53Real Annual Wages

Source: Bloomberg and Organization for Economic Cooperation and Development

Last Points 2017: U.K. 0.0%; Fr 1.2%; Italy -1.0%; Ger 1.0%year/year % change

1991 1995 1999 2003 2007 2011 2015-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

United Kingdom

France

Italy

Germany

CHART 54Share of Real Aggregate Income


Last Points: 2017by income quintile

1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007 2011 20150%

2%

4%

6%

8%

10%

12%

Lo

west

and

Seco

nd

Qu

inti

le

14%

16%

18%

20%

22%

24%

26%

Th

ird a

nd

Fo

urth

Qu

intile

42%

44%

46%

48%

50%

52%

54%

Hig

hest

Qu

inti

le

1st Quintile (lowest)

2nd Quintile

3rd Quintile

4th Quintile

5th Quintile (highest)

CHART 55Share of Exports Linked to Global Supply Chains

Source: World Trade Organization



increasingly expensive to extract and isof lower quality after a field’s productionpeaks. Based on his theory, he predictedthat production in the lower 48 stateswould peak in the early 1970s. So asdemand for petroleum grew, shortagesand sky-high prices might impedeeconomic growth.

Few believed him at the time of hispredictions. U.S. oil output was expandingrapidly after World War II and, indeed,American production not only supplieddomestic needs but also much of the restof the world through exports. Still, hisforecast proved accurate (Chart 63, page23).

CHART 56Product Composition of U.S. Tariffs on Chinese Imports (based on total value)

Source: Peterson Institute for International Economics and The Wall Street Journal

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CHART 57Iron Ore Spot Price

Source: Bloomberg

Last Point 11/30/18: $64.71$ per metric ton


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His followers subsequently extended hisconcepts globally and believed thatworldwide production would top out in2010 or in 2012 at the latest. They wereconvinced that no big economically-feasible oil fields remained to be found,so new oil supplies would continue to fallshort of demand increases. Theydiscounted the fact that reserves areoften underestimated since oil fieldsproduce more than original conservativeestimates.

More recently, however, oil producersthemselves are forecasting that demand,not supply, will peak in the next severaldecades. Royal Dutch Shell andNorway’s Statoil see the peak as early asthe mid-2020s, but say that 2030 is morelikely. Shell’s CEO last year said oilprices would remain “lower forever”and never regain the earlier high of $147a barrel in the summer of 2008 (Chart64, page 23). The International EnergyAgency says oil demand will peak, butprobably by 2040. The Carbon TrackerInitiative, a London-based think tank,thinks fossil fuel demand will top outaround 2023. BP looks for peak oildemand between 2035 and 2040 andhas lowered its breakeven point for oilprices from $60 a barrel to $35 to $40 abarrel this year. Norwegian risk-management firm DNVGL believes oildemand will max out in five years.

China has been the biggest source ofcrude oil growth in the past decade, butChina Petroleum & Chemical Corp., amajor fuel marketer, says gasolinedemand in China could peak in 2025.IHS Markit believes the demand peakwill come in 2040 or a few years earlierwith faster adoption of new technologies.

Demand PeakAs we discussed in detail in “Crude Oil:Peak Supply to Peak Demand” (October2018 Insight), production of natural gas,a major competitor with oil, is explodingdue to fracking in the U.S. (Chart 65, page23). Furthermore, natural gas, after

CHART 60Global Crude Oil Supply and Demand

Source: Energy Intelligence Group and The Wall Street Journal

Last Points 10/18: supply 12.5; demand 9.0change since 2010; millions of barrels per day

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CHART 58Crude Oil Spot Prices

Source: Bloomberg

Last Points 11/30/18: Cushing $50.93; Midland $43.33; WCS $21.93$ per barrel


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CHART 59U.S. Crude Oil Inventories and Production

Source: Bloomberg and Department of Energy

Last Points 11/30/18: inventories 450.5; output 11.7millions of barrels

Jan-18 Mar-18 Apr-18 Jun-18 Aug-18 Oct-18380

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Production (million barrels/day) - right axis



being cooled and converted to liquefiednatural gas, is now exported in specially-built ships (Chart 66, opposite page) andthereby competes with oil globally—andwith the added attraction of lower carbonemissions. Gas is expected to be 24% ofthe world’s energy mix by 2040, up from22% in 2016 with LNG’s share jumpingfrom 33% last year to 40%. Canada isdeveloping major facilities to ship LNGto Asia from British Columbia, a muchshorter distance than from the U.S. GulfCoast.

Renewable energy is growing rapidly(Chart 67, page 24), driven by publicpolicies in reaction to public concernsover carbon emissions. Wind and solarenergy still need considerablegovernment subsidies, but costs aredropping rapidly due to technologicalinnovations and economies of scale.

Coal FallsFrom around 1970, energy from coal,petroleum and natural gas fell from 93%of the U.S. total to 78% (Chart 68, page24), but until 2005, that decline was dueto the rise in nuclear energy. Since then,the drop in nuclear output’s share due tosafety concerns and costs has beenreplaced by renewables as a share oftotal energy production. Burning oilcurrently generates only 4.3% of globalelectricity, half the share two decadesago, and it is expected to drop to 2.5% by2025.

More than half of power-generatingcapacity added worldwide in recent yearshas been in renewable sources such aswind and solar, according to the IEA. In2016, the latest data, $297 billion wasspent on renewables compared to $148billion on new nuclear, coal, gas and fuel-oil power plants. Note that althoughrenewables are growing rapidly, they stillonly accounted for 12.1% of electricitygeneration last year (Chart 67), but theIEA believes renewables will make up56% of net generating added capacitythrough 2025, up from 54% in 2016.

CHART 63U.S. Crude Oil

Source: Bloomberg and Energy Information Administration

Last Points 11/23/18: consumption 21.1; production 11.7millions of barrels per day

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CHART 62U.S. Crude Oil Net Imports

Source: Department of Energy

Last Points 8/18: total net imports 6.3; net imports ex. Can/Mex 2.0millions of barrels per day

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CHART 61U.S. Crude Oil Supplied and Net Imports

* Includes crude oil and petroleum products Source: Bloomberg and Department of Energy

Last Points 11/30/18: supplied 21.1; net imports 5.2millions of barrels per day

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Net Imports (4 week average) - right axis



Solar energy capacity globally grew 50%in 2016 but half of that expansion was inChina and driven by government edictsin response to serious air pollution. Chinarepresents half of global solar energydemand and 60% of solar cellmanufacturing capacity.

ConservationSince the 1973 Arab oil embargo, energyconservation has been in vogue. And ithas been effective. Energy research andinformation company IHS reported in2015 that the U.S. was 2½ times moreenergy efficient than in the 1970s. Andfurther improvements have occurred inthe last three years. Energy consumptionper U.S. dollar of economic activity hasdeclined since 1970 in major countries,by 43% in Canada, 61% in the U.S., 48%in Japan and 70% in the U.K. (Chart 68).

Corporate average fuel efficiency(CAFE) standards were created byCongress in reaction to the energyshortages and leaps in oil prices followingthe Arab oil embargo. In 1978, new carswere required to average 18 miles pergallon, although actual efficiency inrealistic driving conditions has neverbeen as high as CAFE standards (Chart69, page 24). That standard rose overtime, but with ample energy supplies, realgasoline prices are down 35% since 2011.So the rationale for fuel efficiency thenshifted from less consumption to lowergreenhouse gases. Tailpipe emissionstandards had the same goal.

Due to limits on the potential efficiencyof internal-combustion engines, the 54.5miles per gallon goal further encouragedthe development of electric vehicles.They are growing from a small base, butrapidly, and were still only 1.2% ofvehicle sales in 2017 (Chart 70, page 25).If they become extremely popular, itcould cause a big drop in crude oilconsumption. Transportation fuelaccounts for about half of crude oil useand autos account for around half of

CHART 64WTI Crude Oil Price

Source: St. Louis Federal Reserve and Department of Energy

Last Points 11/30/18: $50.93$ per barrel

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CHART 65U.S. Natural Gas Production


Last Point 9/18: 104.5billions of cubic feet per day

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CHART 66U.S. Natural Gas Exports

Source: PointLogic Energy and Bloomberg

Last Point 9/18: 3,622billion cubic feet; seasonally-adjusted annualized rate

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that, or 25% of total oil demand. Electricvehicle battery technology is increasingrapidly and as costs drop, electric vehicledemand should expand beyond luxury-car buyers.

Growing Oil SupplyJust as looming peak demand depressescrude oil prices, so does ongoing excesssupply. As noted earlier, OPEC inSeptember pumped oil at a level that is1.13 million barrels per day more thanthe global market will need in the firsthalf of 2019. In October, OPEC outputrose another 127,000 barrels a day andRussian production climbed by 50,000barrels a day.

Recently, oil prices have nosedived inpart because the Trump Administrationhas backed off its complete embargo onIranian crude exports by allowing eightcountries to continue to receive oil fromthat country. So Brent, the internationalbenchmark, has plunged from $85 perbarrel earlier to $58.71 per barrel (Chart5), below the $88 per barrel price SaudiArabia needs to balance its governmentbudget (Chart 71, opposite page).

Still, American shale oil frackers areincentivized to invest in the PermianBasin even at prices $10 a barrel lowerthan their current levels. North Dakota'sBakken shale region pumped a record1.3 million barrels a day in October,more than Oman or Libya, and ever-increasing efficiency now permitsproducers to operate at $40 per barrelcompared with the WTI benchmark priceof $25 per barrel. Costs to drill andcomplete wells are down 17% since2011. As a result of horizontal drillingand other improvements, Bakken oiloutput has jumped from about 300,000barrels a day in 2011 to 1.3 millionbarrels a day even though the number ofactive drilling rigs has dropped fromover 200 to about 50.

So the Saudis plans to cut output by 1million barrels a day to force up prices

CHART 67Electricity Produced from Renewable Sources

Source: Frankfurt School-UNEP Collaborating Centre and The Wall Street Journal

Last Point 2017: 12.1%as a share of global electricity production

2007 2008 2009 2010 2012 2013 2014 2015 20175%

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CHART 68Energy Consumption

Source: Organization for Economic Cooperation and Development

Last Points 2016: Canada 0.18; U.S. 0.13; Japan 0.09; U.K. 0.07ton of oil equivalent per thousand $

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CHART 69Corporate Average Fuel Economy (CAFE) of U.S. Vehicles (MPG)

and Average MPG for New Cars by Production Year

Source: National Highway Traffic Safety Administration and Environmental Protection Agency

Last Points 2017: CAFE 33.76; MPG 29.15

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CHART 70U.S. Automobile Sales and Electric Vehicle Market Share

Source: Bureau of Economic Analysis and www.insideevs.com

Last Points 2017: auto sales 17.56; elec. vehicle mkt. share 1.2%

2010 2011 2012 2013 2014 2015 2016 20178

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Electric Vehicles Market Share - right axis

CHART 72Crude Oil Production

Source: Bloomberg, Department of Energy and Energy Intelligence Group

Last Points: 10/18millions of barrels per day

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regardless of what other producers do.And Russia, the world’s biggest crude oilproducer (Chart 72), is resisting. Theirgovernment budget will balance with$53 per barrel this year (Chart 71),below the current $58.71 per barrelprice of Brent, and, with budget discipline,it is headed toward break-even at $44per barrel in two years. That’s downfrom a $115 per barrel break-even forthe Russian budget in 2013.Consequently, the Russians are beingencouraged to produce more, not less,oil because they no longer need highprices.

About 40% of Russia's governmentbudget is funded from oil and gas, andRussian President Putin said recentlythat a $60 per barrel Brent price was"absolutely fine." Russia has a largedomestic oil-field services industry withexpenses in rubles, a currency that'sfallen 14% against the dollar so far thisyear.

Russia's current coziness with the Saudismay be that of a hot friendship cooling.Russia is competing vigorously in globalenergy markets, especially in natural gas.In part to compete with U.S. LNG inWestern Europe, state-owned energygiant Gazprom's average selling pricefor gas has dropped 50% since 2013compared to the 20% in the Americanbenchmark.

Leaping supply outside OPEC plus therealization that oil demand will peak incoming years is forcing the Saudis toconsider the likelihood that demand willdrop so much that OPEC loses swayover petroleum and disbands. Theresearch project by the King AbdullahPetroleum Studies and Research Centerplans to assess the short/medium-termconsequences of a dissolution of OPEC.

And this view comes in the face of majorWestern energy companies restraininginvestment in oil exploration anddevelopment to the point that annual

CHART 71Oil Break-Even Price for Major Petro-States

Source: The Wall Street Journal and International Monetary Fund

break-even price needed to balance national budget; $ per barrel$216

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11/30/18 Brent Crude Price , $/barrel: $58.3111/30/18: Brent Crude Price $58.71 per barrel



additions to proven reserves are fallingshort of their withdrawals. Since the oilprice collapse in 2015-2016 (Chart 64),their emphasis has shifted from findingnew reserves to developing knownreserves and low-cost production thatgenerates the cash flow that investorsnow prefer.

Nevertheless, BP, still recovering fromretrenchment and asset sales followingits fatal blowout in the Gulf of Mexico in2010, has begun production in its hugeNorth Sea project that’s expected toproduce 120,000 barrels of oil a day for40 years. BP has slashed North Seaproduction costs from a peak of morethan $30 per barrel in 2014 to less than$15 per barrel and expects a furtherreduction to $12 per barrel by the end ofthe decade. Shell plans to spend $600million to $1 billion per year in comingyears on renewed North Sea activitiesthat are once again attractive after itscosts have declined 60%. At its peak,around 2000, the North Sea producedas much oil as Saudi Arabia, but outputhas fallen by a third since then.

End Of OPECIf OPEC disappears, at least as aneffective cartel, it will be no surprise, atleast to us. As we noted years ago,American frackers, not OPEC, are nowthe swing producers and U.S. output,now running 11.7 million barrels a day(Chart 73), will probably surpass that ofeven Russia next year (Chart 72).

Cartels exist only to keep prices aboveequilibrium by curtailing output. So thecartel leader’s job—in the case of OPEC,it’s Saudi Arabia—is to cut its output toaccommodate those in the cartel whowant more than their shares as well asoutside producers. Consequently, in thelast two decades, OPEC production hasbeen essentially flat while the growth inglobal demand has been satisfied by non-OPEC producers including Russia,Canadian oil sands and Americanfrackers.

CHART 73U.S. Crude Oil Production


Last Point 11/23/18: 11.7millions of barrels per day

2007 2009 2011 2013 2015 20173

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CHART 74A Successful Cartel

1. Involves a commodity that can otherwise be left in the ground, avoidingproduction and inventory costs until it's needed.2. Its product is so much in demand that buyers are relatively insensitive toprice.3. The commodity has few if any close substitutes.4. It includes most of the low-cost suppliers and has few meaningful non-cartelcompetitors.5. It involves relatively few cartel members, thereby promoting discipline.6. It's sponsored by governments and even religious authorities that benefitfrom the cartel and protect it.7. It operates in a period of strong economic growth and robust demand forthe product.8. It faces few technological improvements in the industry.

CHART 75Unfavorable Climate for OPEC

1. Alternatives to oil, especially natural gas but also government-subsidizedrenewables, are growing.2. Non-OPEC supplies are leaping, notably from Russia and especiallyAmerican frackers.3. Infighting among OPEC members has destroyed discipline.4. Global economic growth is shifting from goods production to services andthereby curbing oil demand.5. Conservation is limiting oil demand.6. Rapid technological advances in fracking, horizontal drilling, deep-waterand Arctic drilling, etc. are mushrooming non-OPEC supplies at low anddeclining costs.



OPEC, in business 58 years, has lastedlonger than most cartels. In the 20thcentury, cartels held together from 3.7to 7.5 years. Earlier, OPEC enjoyed theattributes of a successful cartel (Chart74, opposite page) but that is no longer thecase (Chart 75, opposite page). OPEC maycontinue to exist, but it is becoming lessand less relevant as its share of global oiloutput shrinks, and even more so, itsportion of worldwide energy supply,considering the rise of natural gas andrenewables. And this is all in the face ofslowing demand growth and a likely peakin crude oil consumption within the nextseveral decades.

10. Real commodity prices fall steadily in the long run. We’ve argued for years that commodity supplies continue to be morethan ample, especially in the face of human ingenuity’s ability to use them more efficiently and find substitutes whenevershortages appear.

Sure, there is only so much oil, copper, iron, etc. in the earth’s crust and we can remember when serious economists forecastlimitations on telecommunications growth since there would not be enough copper for wires. Then came fiber optics, madefrom silicone, the second most abundant element in the earth’s surface.

Anyone worrying about shortages should study Chart 76, which traces the CRB broad commodity index in real (inflation-adjusted) terms since 1774. Notice that since the mid-1800s, it’s been steadily declining with only temporary spikes causedby the Civil War, World Wars I and II and the 1973 oil embargo. The decline in the late 1800s is noteworthy in the faceof huge commodity-consuming development then: In the U.S., the Industrial Revolution and railroad-building were in fullflower while forced industrialization dominated Japan.

The Bottom LineThe Fed probably hasn't constricted credit enough to, as usual, precipitate a recession. And there's no current financial bubblesuch as the dot com exuberance of the late 1990s or the subprime mortgage bonanza of the mid-2000s to generate a crisisand recession. Historically, these are the two causes of recessions.

Still, complacency bred by the long, Fed-led rise in the economy and financial assets may be a confidence bubble that wedon't fully comprehend until it breaks with financial setbacks and recessionary results.

CHART 76Real U.S. Commodity Prices

Source: Bianco Research, Bureau of Labor Statistics and Historical Statistics of the United States

Last Point 10/18: 75.53CRB index deflated by CPI

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INVESTMENT THEMESOur Investment Themes section reflects ideas that may serve as the basis for investment decisions within clientportfolios. We actively manage client portfolios during the month, and any ideas underlying portfolio changes

will not be shown in Insight until the following month’s report.

As we stated last month, we’re not forecasting a recession yet. But in view of the credit tightening by the Federal Reserve,falling stock prices, a likely yield curve inversion, junk bond spreads opening, falling housing activity, the probable declinein corporate profits growth, exuberant consumers, falling global leading indicators, dropping commodity prices,mounting energy market troubles, the escalating U.S.-China trade war and other leading indicators, a business downturnin the U.S. and elsewhere in the next year or so is increasingly likely.

The Fed probably hasn't constricted credit enough to, as usual, precipitate a recession. And there's no current financialbubble such as the dot com exuberance of the late 1990s or the subprime mortgage bonanza of the mid-2000s to generatea crisis and recession. Historically, these are the two causes of recessions.

Still, complacency bred by the long, Fed-led rise in the economy and financial assets may be a confidence bubble thatwe don't fully comprehend until it breaks with financial setbacks and recessionary results.

In this environment, our investments are definitely cautious and defensive.

Our Suggestions

1. Long the dollar, which is a global safe-haven and benefits from ongoing Fed hikes of short-term interest rates as wellas trade war uncertainties.

Does your current portfolio need more insight?Interested in more than just Insight?

A. Gary Shilling & Co., Inc. offers investment advisory services to institutional and individual clients withunique investment strategies developed by the firm’s founder, Dr. A. Gary Shilling, and his research team.

We utilize strategic analysis, economic forecasting and financial developments in the U.S. and abroadto make thoroughly-researched investment decisions.

To be truly successful, Gary Shilling believes an investment strategy must be non-consensus andchallenge the common view that is generally fully-known and priced into the financial markets.

For more information on A. Gary Shilling & Co.’s investment advisory services, please visit our website atwww.agaryshilling.com/investment-advisory/ or email us at [email protected].

DISCLOSURE: A. Gary Shilling & Co., Inc. is a registered investment adviser with the State of New Jersey. This is not an offer to sellor solicitation of an offer to buy any securities or instruments. Past performance is no guarantee of future performance.



INVESTMENT THEMESOur Investment Themes section reflects ideas that may serve as the basis for investment decisions within clientportfolios. We actively manage client portfolios during the month, and any ideas underlying portfolio changes

will not be shown in Insight until the following month’s report.

2. Sell emerging-market stocks and bonds. We favor this theme in view of the dollar’s strength, which depresseddeveloping country currencies and their ability to service their $8 trillion in dollar-denominated debts and pay for dollar-based commodity imports. Also, ongoing Fed interest rate hikes make the U.S. more attractive to U.S. and foreigninvestors than developing economies.

3. Sell U.S. overall market indices as the sell-off persists and gains momentum.

4. Short commodities such as copper as the dollar rises and demand weakens as the Chinese and other economies sag.Also, short crude oil as supply exceeds demand.

5. As an anchor to windward, we continue to suggest small long equity positions in defensive sectors such as health care,consumer staples and utilities.

6. Long Treasury bonds with a small position. They, like the dollar, are a safe-haven in a sea of global trouble. Still,spillover from Fed-led rises in short-term rates is a partial offset. In any event, investors are weighing pro Treasury bondforces such as deflationary pressures and Treasurys’ safe-haven status more heavily than Fed tightening, as witnessed bythe less-than-normal spillover from central bank rate increases to Treasury bond yields.

7. Short Bitcoin, which more and more looks like a giant Ponzi scheme and is only useful for illegal purposes.

8. In the current uncertain investment atmosphere, we suggest a heavy cash position.

Gary Shilling's next webinar is scheduled forThursday, December 20 at 4:15 pm Eastern Time

Not a subscriber to our webinar series?Call us at 973-467-0070 for details and to sign up.



Summing Up

Another wild ride—both up and down—last month endedwith major indices up slightly as investors spent Novemberconcerned about the ongoing trade tensions with China andits slowing economy, plunging oil prices, rising interestrates, exploding federal deficits, the housing slump andcreeping concerns about a U.S. recession.

Yields on 10-year Treasury notes last month briefly hit theirhighest levels since early 2011 as the yield curve continuedto head towards inversion. Meanwhile, the dollar movedsideways against the euro and the yen.

Look for the Fed to raise its federal funds rate for thefourth time this year when its policymakers meet onDecember 18-19. What’s in store for 2019, though, isanyone’s guess, with minutes from the Fed’s early Novembermeeting revealing some concerns among policymakersabout further rate increases if the economy runs intoheadwinds.

Later in the month, Fed Chairman Powell said he was “veryhappy about the state of the economy,” crediting the Fedfor playing a role in the long expansion. Powell also joltedthe markets sharply upward late in the month when he saidthat interest rates are “just below” a level consideredneutral.

The second estimate of third quarter GDP showed a 3.5%gain—the same as the initial estimate—thanks mainly toquicker inventory-accumulation and more business spendingon equipment. Consumer spending and exports wererevised downward from the first report.

Weaker demand, especially from China, and rising U.S.production led crude oil prices to plummet last month bya third from their October 3 peak and to their lowest levelin more than a year. At one point in November, oil pricesdeclined for 12 straight tradingdays—the longest stretch sincefutures trading began in 1983.

Higher gasoline prices led toinflation figures that were thehighest in some time, withconsumer prices in October up0.3%, the biggest increase in ninemonths. The 12-month rate wasup 2.5%. Core CPI rose 0.2% andthe 12-month rate was up 2.1%.Producer prices, meanwhile, rose0.6% in October, the biggest

THE NUMBERS

Dow Jones IndustrialsS&P 500Nasdaq CompositeNikkei AverageSTOXX Europe 600Shanghai CompositeFTSE 100

*through Nov. 30

Nov. 2018% Change*

Year-to-Date% Change

+1.7%+1.8%+0.3%+1.9%-1.1%-0.5%-2.2%

+3.3%+3.3%+6.2%-1.8%-8.0%

-21.3%-9.2%

10-yr. Treasury note$=¥€=$West Texas Inter.

10/31/1811/30/182.99%113.48

1.13$50.72

3.15%112.88

1.13$65.07

increase since late 2012. The 12-month rate was up 2.9%.Core PPI rose 0.5% in October and the year-over-yearcore rate was up 2.6%.

Retail sales rose 0.8% in October on strength in auto salesand building material sales related to the recovery fromHurricane Florence. September’s 0.1% gain was reviseddown to a 0.1% decline. With online shopping more andmore prevalent, the mad rush of Black Friday at bricks-and-mortar stores isn’t as big a barometer of holidayshopping as it used to be. Instead, Internet sales rose morethan 26% from Wednesday through Black Friday, Nov. 23.vs. a year earlier, according to Adobe Systems, which alsoreported that online sales on Cyber Monday, Nov. 26, rose19.3% to make it the largest online shopping day that it’stracked.

Nonfarm payrolls rose by a strong 250,000 in Octoberwhile the August number was revised up by 16,000 andSeptember’s numbers were revised down by 16,000. Thenational unemployment rate remained at 3.7% while thelabor participation rate rose to 62.9% from 62.7%. Averagehourly wages, though, increased 3.1% year-over-year, thebiggest gain since 2009.

Housing starts rose 1.5% in October from September butwere 2.9% lower than a year earlier. Single-familygroundbreakings fell 1.8% while multi-family starts jumped10.3%. Building permit issuance fell 0.6%. Mortgage ratesare near a seven-year high, and home sales are feeling theeffects. After six straight declines, existing home sales rose1.4% in October from September but were down 5.1%from a year earlier. The median price of $255,400 was up3.8% from a year earlier. New home sales, though, fell8.9% in October. The median price of $309,700 was 3.1%lower than a year earlier.

The S&P/Case-Shiller 20-city house price index rose 5.1%in September as monthly price increases continue to shrink.Meanwhile, the National Association of Home Builders’

confidence index plunged eightpoints in November to 60. Builderscited rising rates and home pricesas factors in the decline.

The University of Michigan’sconsumer sentiment index fell from98.6 in October to 97.5 inNovember. The ConferenceBoard’s consumer confidenceindex fell to 135.7 in Novemberfrom 137.9 in October.

Fred T. RossiEditor



Climate Change: A Look From Both Sides

The spate of powerful hurricanes this year in the AtlanticOcean and Gulf of Mexico as well as the devastatingtyphoons in the Pacific Ocean along with other extremeweather events such as severe winter storms, wildfires inthe West and European droughts, along with the issuanceof two new reports, have raised fresh concerns aboutclimate change and how much of a threat it poses to theplanet.

One side claims humans are playing a major role in risingglobal temperatures and urges immediate action to staveoff what they feel will be a catastrophe affecting all aspectsof life while the other side thinks it’s simply part of a naturalclimatic cycle that’s not as dire as is being proclaimed andthat would cost far too much in jobs and economicupheaval to address in the way that’s being pushed byactivists.

In the U.S., at least, opinions about climate change, likepretty much everything else, are divided mainly by politicalleanings, with activists believing not only that it exists butthat addressing it via government action is of paramountimportance and warning of dire consequences if thingsaccelerate. The other side tends to be more cautious orskeptical about the causes of climate change and prefersmarket-based, not government-imposed, solutions to addressany issues related to it. They also point out that many of thedoomsayers’ dire warnings and forecasts have not pannedout.

We'll do our best to explore the issue from both sides,starting with the more skeptical viewpoint and then followedwith the other side's viewpoint.

New WarningsConversations about the climate change issue were elevatedanew in October when a United Nations scientific panel onclimate change issued a report that painted a far moretroubling picture of the immediate consequences of climate

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change than previously thought, with dire warnings of aworld of worsening food shortages and wildfires, and amass die-off of coral reefs as soon as 2040. The study bythe UN’s Intergovernmental Panel on Climate Changefound that if greenhouse gas emissions continue at thecurrent rate, the atmosphere will warm up by as much as2.7oF above pre-industrial levels by 2040, inundatingcoastlines and intensifying droughts and poverty.

The IPCC was the subject of some controversy 10 yearsago when hacked emails led to questions about itsmethodology in earlier studies. A series of independentinvestigations concluded that researchers at the ClimaticResearch Unit of the University of East Anglia in Englandhadn’t skewed science to inflate evidence of man-madeglobal warming, but did criticize them for not sharing dataand for presenting information in a “misleading” way in oneinstance and urged climate scientists to be more transparentin responding to critics and explaining their methods.

And a new National Academy of Sciences report issued inlate October is calling for a “substantial research initiative”focused on developing technologies that directly removecarbon dioxide from the atmosphere. The report envisions10 billion tons of CO2 emissions-removal needed annuallyby the middle of this century, an amount that doubles by2100.

The report represents a significant shift in thinking because,for decades, experts said nations could prevent largetemperature increases mainly by reducing reliance on fossilfuels and moving to cleaner sources like solar, wind andnuclear power. But nations have delayed so long in cuttingtheir CO2 emissions that even a major shift toward cleanenergy would most likely not be enough, according to thisreport.

Late last month, the Trump Administration also quietlyissued a report by 13 federal agencies that warned of stark



CHART 1Average Global Temperature: 1880-2013

Source: NASA

CHART 2Carbon Dioxide and Methane Levels: 1750-2009

Source: NASA

atmospheric samples (Mauna Loa)ice core (Law Dome)

atmospheric samples (South Pole)ice core (Law Dome)

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consequences resulting from climate change andpredicting that the damage could knock as muchas 10% off the size of the U.S. economy by the endof this century. The leader of the Administrationquickly threw cold water on his own government'sreport, saying a few days after its release, “I don'tbelieve it.”

A former Obama Administration undersecretaryof energy, Steven Koonin, played down thewarnings of economic doom in the report, writingin The Wall Street Journal that his analysis of theNational Climate Assessment showed a worse-case scenario where annual GDP growth will bereduced by 0.05 percentage point, given likelyoverall GDP growth between now and the end ofthe century.

Consensus?The world is getting warmer.Whether the cause is humanactivity or natural variability,thermometer readings allaround the world have risensteadily since records started tobe kept 140 years ago (Chart 1).Furthermore, carbon dioxidelevels since the start of theIndistrial Revolution haveincreased nearly 38% as of2009 and methane levels haveincreased 148% (Chart 2).

Surveys of the peer-reviewedscientific literature and theopinions of experts consistentlyshow a 97%–98% consensuson humans causing climatechange. That’s also the positionof the Academies of Sciencefrom 80 countries plus manyscientific organizations thatstudy climate science. Morespecifically, around 95% ofactive climate researchers actively publishing climate papers endorse the consensus position.

But climate skeptics question these consensus figures, taking issue, for one, with the methodologies that leads to the 97%-98% figure or questioning the sources for such claims.

PollsOpinion surveys have consistently shown a general belief that the climate is changing and that humans play a big role in thosechanges. A Gallup poll last year revealed Americans are increasingly concerned about climate change, with clear majorities



CHART 3

believing that global warming is caused by human activitiesand that its effects are already underway. More Americansalso worry about global warming and think it will pose aserious threat in their lifetimes (Chart 3).

Another poll, from the University of Michigan’s Center forLocal, State, and Urban Policy, showed 60% saying thatglobal warming is taking place and that human activity iseither primarily or partially why temperatures are rising.That’s higher than the previous high of 58% recorded in2008, 2009 and 2017. Slightly more than a third ofrespondents said humans were primarily responsible forglobal warming while 26% said human activity was partiallyresponsible. On the other hand, 12% said climate changewas caused by natural patterns with another 12% sayingthey weren’t sure if it is occurring at all. And 15% of surveyrespondents said the climate is not changing.

What To Do?While there is general agreement among scientists that theclimate is changing—and that the effects will lead to somedegree of rising sea levels, more extreme temperatures,worsening air quality, population displacement—what to doabout it is something that’s vexed policymakers for decades.NASA says that “answering these questions is perhaps themost significant scientific challenge of our time.”

On one hand, there are those who tout things that most ofthe public have heard about for years, including establishinga carbon tax; subsidizing clean energy and ending subsidies

for so-called “dirty energy”; moving away from coal as anenergy source; increasing energy efficiency via higher fuelstandards, upgraded lighting and better insulation; investingin clean-energy innovation; moving away from fossil fuel-powered vehicles to ones that run on electric power; andemphasizing reforestation to reduce carbon dioxide levelsin the air.

Climate Change From The Right:It's Real, But…Two conservative analysts, Jim Manzi from the free-market-oriented think tank The Manhattan Institute andPeter Wehner, a veteran of the Reagan and Bush WhiteHouses and senior fellow at the Ethics and Public PolicyCenter, a conservative think tank, wrote a piece for NationalAffairs three years ago offering market-based ideas foraddressing climate change, but they also castigatedconservatives who they say have “plugged their ears notonly to ludicrous exaggerations [of the climate changealarmists], but also to the available facts.”

They criticized conservative political leaders for adoptingthe “I’m not a scientist” talking point on climate change,which the two writers said was “an attempt to invokeignorance in order to avoid embarrassment,” adding that“scientific ignorance is not an excuse for refusing to stakeout a position.”

While a good deal of right-leaning observers andpolicymakers accept the scientific consensus that humans

Summary of Americans' Views on Global Warming

Source: Gallup



are the primary driver of climate change, there are someoutliers. Oklahoma Sen. James Inhofe, ironically thechairman of the Senate Environment Committee, hascalled climate change “the greatest hoax” ever perpetuatedon Americans and has criticized the EnvironmentalProtection Agency as an “activist organization” burdeningeveryone from farmers to fossil-fuel companies withexcessive regulations. Inhofe garnered attention in February2015 when he took to the Senate floor holding a snowballas proof, he said, that the globe could not be warming in anythreatening way, given the cold weather outside—in themiddle of winter.

Manzi and Wehner say that the position of “either avowedignorance or conspiracy theorizing is ultimatelyunsustainable” and criticize those who “still cling to it” in thebelief that “accepting the premise that some climate changeis occurring as a result of human action means accepting theconclusions of the most rabid left-wing climate activists.”Conservatives, they believe, fear that accepting the realityof climate change will set them down a “twisted road witha known destination: supporting new carbon taxes, a cap-and-trade system, or other statist means of energy rationing,and in the process ceding yet another key economic sectorto government control. Conservatives seem to be on thehorns of a dilemma: They will have to either continue toignore real scientific findings or accept higher taxes, energyrationing, and increased regulation.”

In general, though, right-leaning and free-market-orientedgroups have been examining the issue of climate change andseeking ways to address it while also casting a skeptical eyeon some of the more liberal approaches to the problem.

The CATO Institute, an influential libertarian think-tank,states that global warming “is indeed real, and humanactivity has been a contributor since 1975.” But the groupcalls the issue “very complicated and difficult” and warnsagainst “very unwise policy in response to political pressure.”While there are numerous legislative proposals forsubstantially reducing carbon dioxide emissions, “there isno operational or tested suite of technologies that canaccomplish the goals of such legislation.” CATO says that,“fortunately, and contrary to much of the rhetoricsurrounding climate change, there is ample time to developsuch technologies, which will require substantial capitalinvestment by individuals.”

Lee Lane, in a 2014 piece for The New Atlantis, a journalpublished by the right-leaning Center for the Study ofTechnology and Society, took conservatives to task for

“dogmatically asserting that no serious threat is on thehorizon.” He stated that “bald claims that man-madeclimate change is a hoax—which would imply that tens ofthousands of scientists are engaged in a coordinatedconspiracy—are slowly losing credence, even forconservatives.”

Predictions Come True?Back in 1988, James Hansen, a NASA scientist, testifiedbefore a congressional committee amidst a record-settingheatwave during what would become a record-settingsummer, and expressed a “high degree of confidence” in a“cause and effect relationship between the greenhouseeffect and observed warming.” Patrick Michaels and RyanMaue from the CATO Institute’s Center for the Study ofScience, said Hansen’s testimony “lit the bonfire of thegreenhouse vanities” that set off a global debate aboutglobal warming.

Hansen put forth three possible scenarios for the future ofCO2 emissions. The first, which he called “business asusual,” maintained the accelerating emissions growth typicalof the 1970s and 1980s and predicted that the earth wouldwarm by one degree Celsius by 2018. The second scenarioset emissions lower, rising at the same rate in 2018 as in1988, an outcome Hansen said was the “most plausible”and would lead to warming of about 0.7 degrees by 2018.A third scenario, deemed by Hansen to be highly unlikely,forecast temperatures to rise a few tenths of a degreebefore flat-lining after 2000.

Messrs. Michaels and Maue analyzed Hansen’s forecastson the 30th anniversary of his landmark testimony andconcluded that global surface temperatures had “notincreased significantly” since 2000. “Surface temperaturesare behaving as if we had capped 18 years ago the carbondioxide emissions responsible for the enhanced greenhouseeffect. But we didn’t.” The duo said Hansen wasn’t theonly one to get things wrong, noting that the IPCC’s modelshave predicted about twice as much warming has beenobserved since temperature monitoring began in the late1970s.

The authors also noted other claims made by Hansen theysay didn’t pan out. Hansen in 1988 said that the late 1980sand 1990s would see “greater than average warming in thesoutheast U.S. and the Midwest,” but “no such spike hasbeen measured in these regions.” Hansen also predicted in2007 that most of Greenland’s ice would soon melt, raisingsea levels 23 feet over a 100-year period, but this has notoccurred.



The CATO researchers also knocked down Hansen’s 2016prediction that hurricanes would get stronger, citing satellitedata from 1970 onward that “shows no evidence of this inrelation to global surface temperature.” Similarly, theyfound no evidence that storms have caused increasingamounts of damage in the U.S., citing data from theNational Oceanic and Atmospheric Administration thatshow no such increase in damage, measured as a percentageof GDP. How about stronger tornadoes? The oppositemay be true, Michaels and Maue stated, pointing to NOAAdata they say offers some evidence of a decline. “The listof what didn’t happen is long and tedious.”

Saying Hansen’s and the UN’s models were faulty, Michaelsand Maue said several newer climate models project abouthalf the warming predicted by UN models and are in linewith observed temperatures. The flawed predictions, theysay, raises the question of “Why should people worldwidepay drastic costs to cut emissions when the global temperatureis acting as if those cuts have already been made?”

Three years ago, Michaels and Paul Knappenberger madethe case for not a warming world but what they called a“lukewarming” world, saying that “the rate of warming”over the past several decades “has been slower than whatwas anticipated” by various climate models. They concluded

that “future global warming will occur at a pace substantiallylower” than what the U.S. government and internationalagencies are anticipating as they formulate actions tocombat greenhouse gas emissions.

A report in June in the journal Nature Climate Change claimedthat carbon dioxide itself will have a “significant directimpact on Northern Hemisphere summer temperatures,heat stress and tropical precipitation extremes.” CATO’sMichaels and Maue analyzed this and concluded that “it isreally not what it shows,” again pointing to faults in theclimate models.

Anything Positive?While most would agree that a warming planet will, overall,have detrimental effects on everything from rising seas,coastal flooding and population movement to agriculture,air pollution and wildlife and sea life, there are somepositive aspects resulting from a warmer planet.

Warmer temperatures will lead to improved agriculture—and economic growth—in some high latitude regions suchas the northern U.S. and Canada. A recent study in Sciencemagazine analyzed the economic impacts of climate changeon the U.S., county by county, and while the overall impact

CHART 4Predicted Economic Effects of Climate Change on U.S. Counties

Source: Science and The New York Times

GDP growth/loss per year from 2080-2099

Predicted effect on county GDP per year

+5% 0 -5% -15%-10%



was negative, researchers found that states in the Northeastand West would fare relatively well, with county GDPholding steady or even gaining in some locales such as thenorthern parts of Maine, Vermont, New Hampshire,Michigan, Wisconsin and Minnesota as well as isolatedsections of Idaho, Montana, Oregon, Washington State andColorado—and, of course, Alaska (Chart 4, page 31).

Growing seasons will likely lengthen the further north andfurther south from the equator one travels. In the U.S., forinstance, the growing season hinges in great part on the timeof the last frost of the early spring and the first frost of thesubsequent autumn. In New Jersey—a major grower oftomatoes, corn, apples and cranberries—the average lastfrost of the spring is the first week of April and the first frostof the coming winter usually falls in early November.

Frost-Free Season LengthensA recent National Climate Assessment report says thelength of the frost-free season—and the correspondinggrowing season—has been increasing nationally since the1980s and is projected to continue to lengthen. During the

1991-2011 years, the average frost-free season was about10 days longer than during the 1901-1960 years (Chart 5).

The report notes that a longer growing season provides alonger period for plant growth and productivity and canslow the increase in atmospheric CO2 concentrations throughincreased CO2 uptake by living things and their environment.A longer growing season can increase the growth ofbeneficial plants such as crops and forests as well asundesirable ones such as ragweed.

In some cases where moisture is limited, the greaterevaporation and loss of moisture through plant transpiration,i.e., the release of water from plant leaves, associated witha longer growing season can mean less productivity becauseof increased drying and earlier and longer fire seasons, theNCA report points out.

Of course, the flip side of better economic conditions innorthern climates also means worsening economic conditionsin the south, as we'll explore later in the second part of thisreport.

CHART 5

Source: National Climate Assessment



Greenland will also benefit from a longergrowing season and improved fishingnear its waters, which will beadvantageous to its economy. Certainareas may experience cost savings andimproved mobility from reducedsnowfall and less-frequent winter stormssince warmer winters may lead toreductions in snow and ice removal aswell as salting requirements.

As the Arctic ice cap melts (Chart 6), theArctic Ocean could become essentiallyice free in summer before mid-century,and that will result in newly-accessibleshipping routes between the Atlantic andPacific Oceans, thus cutting shippingtime and expenses for vessels that willno longer need to traverse the Panamaand Suez Canals.

The Arctic is potentially a faster, moredirect route between Asia and ports inEurope and eastern North America,with one estimate showing a reductionin travel distance of nearly one third(Chart 7). Between now and 2030,routes connecting North America andEurope with Japan will take an averageof just over 22 days. But by midcentury,more of those routes will have shorterjourney times.

Tourism in certain regions in Europecould see an uptick in summer tourismas the climate there becomes morefavorable, and heating demands inpresently-cold areas would decrease aswinter months get milder. And winterdeaths will decrease as temperatures ingeneral rise, resulting in warmer winterclimates in general.

Market-Based SolutionsWhile not denying climate changeoutright, the general consensus of thosewho don’t subscribe to the climate activists’ agenda is to instead let the free market and new innovations lead the way intackling any issues related to a warming planet. Analysts on this side of the argument tend to be more skeptical of the severityof the problem as well as skeptical of many of the cures—and their costs and their impacts—that are being promoted byenvironmental activists.

CHART 6Annual Summer Arctic Ocean Ice

Source: National Snow and Ice Data Center

CHART 7Japan to Western Europe: Northern Sea Route vs. Suez Canal

Source: Sea News Turkey



Surprising Free-Market AdvocateFred Krupp, the president of the Environmental DefenseFund, probably the leading environmental advocacy groupand a leading voice in the climate change and globalwarming arena, might be one of the last people you’d expectto state that while climate change “is an urgent problem,”the right approach to combatting it is not a “command-and-control solution, with governments telling companies howto retool.” Instead, he argues that “the world shouldharness the marketplace—the most powerful forceavailable.”

In a piece for The Wall Street Journal in October, Kruppcalled for slowing deforestation and restoring damagedforests. “Forests could deliver a quarter or more of thecarbon emissions reductions needed by 2030,” he wrote.Krupp favors cutting short-term climate pollutants such asmethane, which is responsible for a quarter of all currentwarming. EDF’s goal is a 45% reduction in methanepollution from oil and gas by 2025, something Krupp sayswill deliver the same climate benefit over the next 20 yearsas closing a third of the world’s coal-fired power plants. Inorder to “stop letting companies pollute for free,” he callsfor a carbon tax that will be “a much cheaper way of hittingclimate goals than command-and-control regulations.”

Krupp also points out that scientists, investors andphilanthropists also are looking at ways to remove carbondioxide directly from the atmosphere. “It’s a challenge,” hesaid, “but a system that pays a bounty for carbon soaked outof the sky would spur a race to develop and commercializethis promising concept.”

New Vision For Climate PolicyLee Lane, in his 2014 article for The New Atlantis, called fora new vision for U.S. climate policy comprised of threeelements. “The quest for new knowledge about the scienceof climate change and the technologies required to combatit is vital,” he wrote. U.S. climate policy must also be “opento using the full range of available options to lessen thethreat of climate change, not just greenhouse gas control.”And Lane called for the U.S. to adopt “a less hubristic viewof its role as a supplier of global public goods.”

Both the left and the right have, for decades, “assumed thatthe United States can and should serve as the prime supplierof global public goods,” which can include such things asfresh air, knowledge, lighthouses, national defense, floodcontrol systems, and street lighting. “The two sides havemerely disagreed about which kinds of goods wereimportant,” Lane stated, with the right has “focused on oilsecurity and displayed a strong bent toward the use of

armed force” and the left focused on “climate change,biodiversity and human rights,” with a stress on “costlydomestic regulations and vague hopes about global legalism.”

Lane says the world has changed, with the U.S. share ofglobal GDP falling as developing economies mature andgrow. In this environment, what is needed, he says, is aclimate policy “that strives to deepen our scientificunderstanding of the challenges we face, to make incrementalimprovements where they are cost-effective, and to eschewwishful thinking about the political and scientific realities ofthe world in which we live.”

InnovationMarian Tupy, in an article published this past summer bythe Foundation for Economic Education, a libertarianeconomic think-tank, notes that renewable energy is nowhereclose to producing enough power to replace fossil fuels, andasks whether overall energy consumption should belimited—something he said would harm productivity andrestrain growth in peoples’ standards of living. He thinksnot. “Market forces are actually pretty good at reducing theamount of energy used in production.”

The nearly 100-fold increase in the world’s economy overthe past two centuries, he writes, “was powered by fossilfuels.” Replacing them would be costly, Tupy says. “Justthink of the hectares of land and miles of coastline thatwould have to be covered by wind turbines if wind energywere to produce as much energy as fossil fuels can.” Healso cites the unreliability of supply in downplaying theadvantage of green energy. “Wind turbines need wind toturn the blades, water turbines need rain to fill the damswith flowing water and solar panels need sunshine. Whennature does not cooperate, green energy becomesunpredictable and inconsistent.”

Tupy says major economies and businesses have alreadyseen the value of energy efficiency and, thus, increasedenvironmental consciousness. Emissions of CO2 per dollarof GDP have been cut by nearly a third in the U.S. since1960, by more than half in the EU since 1991 and by 75%in China after it abandoned its communist system ofproduction in the late 1970s. And the share of CO2emissions by advanced economies has been declining andis expected to continue doing so (Chart 8, opposite page).While businesses are primarily concerned with their bottomline, Tupy points out that energy consumption usuallyaccounts for a large share of corporate expenses, givingbusinesses a strong incentive to cut their energyconsumption.



Messrs. Manzi and Wehner, in their 2015 National Affairsarticle, spelled out market-based ideas for addressing climatechange that focus on innovation and technology and notnew carbon taxes or cap-and-trade legislation. They citedwork by William Nordhaus, who in October was awardedthe Nobel Prize in Economics, who found that “an optimallydesigned and implemented global carbon tax would providean expected net benefit of about 0.2% of the present valueof global GDP over the next several centuries. Even inNordhaus’s theoretical world,” though, “the tax would beset at a level that would still allow about 75% of theunconstrained damages from emissions to take place, sinceit would be economically more damaging to set the tax highenough to prevent them.”

And the authors add that getting every nation to agree toand then enforce a global tax would require the agreementof governments ranging from the U.S. Congress and theIndian parliament to the Chinese Politburo and VladimirPutin.

Manzi and Wehner cite the technology-driven energyrevolution that America has experienced in the past decadeor so, “with little inducement or guidance from Washington,”that they say has led to “the fastest rate of reduction in CO2emissions of any major country.” A series of innovationshas led to the extraction of unconventional fossil fuels, themost important of which has been fracking, but alsoincludes tight-oil extraction and horizontal drilling. Andthey remind that as late as the mid-2000s, “virtually no one

saw the rapid development of an alternative energy sourceon the horizon.”

The U.S., they wrote, was able to launch its energy revolutionthanks to three core elements they say undergirded similarrevolutions in information technology, biotechnology andcertain other sectors: “a foundation of free markets andstrong property rights; the new-economy innovationparadigm of entrepreneurial start-ups with independentfinancing and competitive-cooperative relationships withindustry leaders; and support by government technologyinvestments.”

Instead of a carbon tax, for instance, Manzi and Wehnerfavor allowing “would-be innovators to learn through trialand error,” government investment “in visionarytechnologies that are too long-term, too speculative or havebenefits too diffuse to be funded by private companies”and promoting “greater high-skill immigration” that will“bring innovators here” and a better education system to“make innovators out of today’s young people.”

Not surprisingly, ExxonMobil, the world’s biggest energycompany, prefers market-based technology and innovationas the basis for a sound climate policy. “Technologicaladvancements that change the way we produce and useenergy will be instrumental to providing the global economywith the energy it needs while reducing greenhouse gasemissions,” the company states. “And history has shown

CHART 8Share of Energy-Related Carbon Dioxide Emissions: 1990-2040

Source: Energy Information Administration

% of world total



that open, competitive markets create strong incentives forindustry to invest in and develop breakthrough technologies.”

Carbon TaxCarbon is present in every hydrocarbon fuel—coal,petroleum and natural gas—and is converted to CO2 andother products when combusted. In contrast, non-combustion sources like wind, sun, geothermal, hydropowerand nuclear do not convert hydrocarbons to CO2, a heat-trapping greenhouse gas.

A carbon tax, a levy on the carbon content of fuels, has itsbackers and detractors (Chart 9), but has been seen as themost politically palatable way to control greenhouse gasemissions.

A number of countries, including the U.K., Ireland, France,Scandinavia, Spain, Portugal, Poland, Chile, South Africaand Argentina, have instituted some form of a carbon tax,and many others are seriously considering it. The numberof carbon pricing initiatives implemented or scheduled forimplementation has almost doubled over the past 5 years,reaching 51 countries in 2018.

Canada will soon institute a nationwide carbon tax, butsome of its provinces have already done so on their own.British Columbia’s carbon tax, which was imposed 10 yearsago, remains the standard-bearer for carbon taxing in theWestern Hemisphere, says the Carbon Tax Center. Thatprovince taxes fossil fuels burned for transportation, homeheating and electricity while reducing personal income taxesand corporate taxes by a roughly equal amount. The carbon

tax is collected at the point of retail consumption, such asat a gasoline station.

A carbon tax has been debated in the U.S. for some yearsand been generally favored to varying extents by bothpolitical parties, but with the word “tax” a radioactive wordthat politicians seeking election don’t want to be associatedwith, it’s never fully come to fruition on a nationwide basis.Some conservative think tanks like the Hudson Institute,the American Enterprise Institute and the Energy andEnterprise Initiative have argued in favor of carbon taxesover cap-and-trade schemes for controlling greenhouse gasemissions. But the right’s general antipathy to anything thathas the word “tax” attached to it holds sway.

No To A Carbon TaxThe CATO Institute’s Robert Murphy, Patrick Murphyand Paul Knappenberger argued against a carbon tax in apaper issued two years ago. They admit that withinconservative and libertarian circles, “some proponentsclaim that a revenue-neutral carbon tax ‘swap’ could delivera double dividend, reducing climate change while shiftingsome of the nation’s tax burden onto carbon emissions,which supposedly would spur the economy.”

The trio sees several problems with those claims. “Futureeconomic damages from carbon dioxide emissions can onlybe estimated in conjunction with forecasts of climatechange,” they wrote, but claim that “recent history showsthose forecasts are in flux, with an increasing number offorecasts of less warming appearing in the scientific literaturein the last four years.”

CHART 9Carbon Tax Pros and Cons

Source: economicshelp.org

Makes polluters pay the external cost of carbon emissions

In theory, enables greater social efficiency as we pay fullsocial cost

Raises revenue that can be spent on mitigating effects ofpollution

Encourages firms and consumers to look for alternatives,e.g., solar power

Reduces environmental costs associated with excess carbonpollution

Higher tax may discourage investment and economicgrowth

May encourage tax evasion; firms polluting in secret toavoid tax

It can be difficult to measure external costs, and how muchtax should actually be

Administration costs in measuring pollution and collectingtax

Firms may shift production to countries without a carbontax

Pros Cons



As a result, “the claim of a double dividend is on evenshakier ground” if the case for emission cutbacks is weakerthan the public has been led to believe. Claiming aconsensus in the literature they examined, the authors statethat “carbon taxes cause more economic damage thangeneric taxes do on labor or capital, so that in general evena revenue-neutral carbon tax swap would probably reduceeconomic growth.”

They also claim that carbon taxes have not lived up to thepromises of their supporters. In Australia, a carbon tax wasenacted in 2012 and then removed two years later after thepublic recoiled against electricity price hikes and a falteringeconomy. The CATO researchers call the experience inBritish Columbia “underwhelming,” saying the tax “has notyielded significant reductions in gasoline purchases, and ithas arguably reduced the [British Columbian] economy’sperformance relative to the rest of Canada.”

As a result, the CATO trio states: “Both in theory and inpractice, economic analysis shows that the case for a U.S.carbon tax is weaker than its most vocal supporters have ledthe public to believe. At the same time, there is mountingevidence in the physical science of climate change tosuggest that human emissions of carbon dioxide do notcause as much warming as is assumed in the current suiteof official models. Policymakers and the general publicmust not confuse the confidence of carbon tax proponentswith the actual strength of their case.”

Nicolas Loris, a Fellow in Energy and Environmental Policywith the Heritage Foundation, a conservative public policythink tank, criticized the idea of a carbon tax in a paperissued last month in the wake of the IPCC’s climate changereport. “Levying a price on carbon dioxide will directly raisethe cost of electricity, gasoline, diesel fuel and home-heatingoil,” he wrote. “But the economic pain does not stop there.When considering the impact of a carbon tax on individuals,it is important to note that carbon is intertwined in all partsof life.” Loris pointed out that energy is “a necessarycomponent for just about all of the goods and servicesconsumed,” meaning that would “pay more for food, healthcare, education, clothes—you name it.”

“Economically Cataclysmic”He said the IPCC’s policy proposals for a carbon tax onevery ton of carbon emitted of between $135 and $5,500by 2030 would be “economically cataclysmic” and wouldbankrupt families and businesses and “undoubtedly catapultthe world into economic despair.”

Heritage Foundation analysts estimated a $37 per toncarbon tax, less than a third of the IPCC’s lowestrecommendation, would reduce U.S. aggregate GDP bymore than $2.5 trillion over the next 17 years. Thattranslates to more than $21,000 in lost income per familywhile also destroying more than a million jobs, half of themin energy-intensive manufacturing sectors. “The higher thetax goes, the greater the economic damage,” the analysisconcluded.

A poll by the Energy Policy Institute at the University ofChicago and the AP-NORC Center for Public ResearchAffairs found that only a little more than half of Americanswould pay as much as a dollar a month to reduce carbonemissions. Only 27% were willing to pay $20 per monthto combat climate change. Even among householdsearning more than $100,000, just 46% were willing to payas much as $20 a month.

The American Energy Alliance, a group that opposesincreased vehicle mileage standards and higher gasolinetaxes, also opposes a carbon tax for a variety of reasons.The purpose of a carbon tax, the group says, is “to make theexisting energy infrastructure more expense, forcingAmericans to change how they live and work.” The AEAsays more expensive energy “means more expensive goodand services,” which it says will disproportionately hurt low-income people and senior citizens while also damagingAmerican economic competitiveness.

The group also claims a carbon tax won’t impact climatechange, asserting that in British Columbia, “a carbon taxwas expected to reduce gasoline consumption, but driverssimply went elsewhere to get cheaper gas, like Alberta orWashington State. And, citing calculations done by theCATO Institute in 2013, AEA says that even if the U.S.eliminated all carbon dioxide emissions, it would have a“negligible impact on the world’s climate.”

Dismantle Capitalism To Solve Climate Change?The Heritage Foundation takes an even dimmer view ofclimate change and some of the proposed solutions toaddress it. Nicolas Loris wrote last month in the wake ofthe IPCC’s climate-change warning, that “the world’s topscientist just gave rigorous backing to systemically dismantlecapitalism as a key requirement to maintaining civilizationand a habitable planet.”

He pointed to a 1989 news article warning that governmentshad a 10-year window of opportunity to solve the greenhousegas effect or face severe coastal flooding, crop failures andan exodus of “eco-refugees” that would threaten political



chaos. Similar dire predictions were made three years agoduring the push to sign the Paris climate accord, Loris said.A UN climate official at the time said, “This is the first timein the history of mankind that we are setting ourselves thetask of intentionally, within a defined period of time, tochange the economic development model that has beenreigning for at least 150 years, since the IndustrialRevolution.”

Loris retorted that the current economic developmentmodel that reigns supreme “does so for compelling reasons.”He wrote that “free, competitive energy markets driveinnovation and provide the affordable, reliable energy thatfamilies and businesses need, and yield a cleanerenvironment.” And he is critical of international efforts tocombat climate change, describing them as “centrally-planned boondoggles” that have resulted in “wasted taxpayermoney, higher energy prices and handouts for preferredenergy sources and technologies—all for no noticeableimpact on climate.”

Is The Sky Falling?David Kreutzer with the Heritage Foundation wrote inSeptember, as Hurricane Florence was hitting the Carolinas,that “in today’s hyper-politicized world of climate science,hardly a thunderstorm passes without somebody invokingthe ‘scientists say’ trope to blame it on carbon emissions.”He said we are not seeing more floods, droughts, tornadoesor hurricanes “in spite of the steady rise in the small amountof carbon dioxide, and in spite of the mild warming of theplanet.”

He cited an IPCC study issued before its dire Octoberreport that stated that “no robust trends in annual numbersof tropical storms, hurricanes and major hurricane countshave been identified over the past 100 years in the NorthAtlantic basin.” Kreutzer says there was “never a time whenthe climate was stable” and when weather events happenedwith “smooth regularity. There have always been cycles—years and decades that included large numbers of hurricanes,and others with few.”

“The fact that tragic weather events have not stopped is notevidence that carbon emissions are leading us to a climatecatastrophe,” Kreutzer concluded. “Perhaps we will see adecades-long increase in one category or another, it hashappened before—but that will not prove the predictionsof catastrophic climate change one way or the other.”

Cap and TradeCap and Trade is another system for controlling carbonemissions and other forms of atmospheric pollution by

which an upper limit is set on the amount a given businessor other organization may produce, but which also allowsfurther capacity to be bought from other organizations thathave not used their full allowance.

The idea was pushed by the Obama Administration butnever enacted by Congress. Even so, a number of countriesincluding Australia, New Zealand, South Korea as well asthe EU have instituted some form of cap and trade. ElevenU.S. states have adopted carbon pricing policies either aspart of a regional initiative or on their own. Nine states inthe northeast jointly cap power sector emissions throughthe Regional Greenhouse Gas Initiative and California hasan economy-wide cap-and-trade system.

Opposition to the concept is similar to opposition to acarbon tax, namely that cap and trade will lead to higherenergy costs, with a U.S. Senate analysis of proposed capand trade legislation in 2007 estimating the costs to theaverage American household being between $800 and$1,300 by 2015 and then increasing to $1,500 to $2,500 by2050. Opponents also claim cap and trade won’t help theenvironment and would have only a negligible effect onlowering the earth’s temperature.

The Heartland Institute reports that where cap and tradehas been tried, specifically the EU, it hasn’t worked, with 12of the 15 EU nations taking part in the 1997 KyotoProtocol—which set greenhouse gas reduction targets andserved as a precursor to cap and trade—failing to meet theirreduction targets. Emissions for all EU countries went upan average 2.1% between 2000 and 2004, Heartland says,while emissions in the U.S., with no such regulatory regime,went up only 1.3% during the same time period.

Climate Change From The Left:It's Getting To Be Too Late…Climate change activists on the opposite side of the politicalspectrum tend to more alarmist and somewhat increasinglypessimistic that significant actions will be taken in time tostem what they feel is a looming environmental andhumanitarian catastrophe. They foresee dire consequencesif global warming accelerates and doesn't prove to be justpart of a long natural cycle.

Former vice president Al Gore, a leading liberal voice onthe subject, has compared global warming to “an asteroidcolliding with the Earth and wreaking havoc.” He haswritten: “Our food systems, our cities, our people and ourvery way of life developed within a stable range of climaticconditions on Earth. Without immediate and decisiveaction, these favorable conditions on Earth could become



a memory if we continue to make the climate crisis worseday after day after day.”

Climate activists agree that, yes, the climate is alwayschanging, but also point out that it’s undeniable that theworld is getting warmer and that the effects of risingtemperatures are widespread and significant.

Rising Air Temperatures and Sea LevelsNASA says that 17 of the 18 warmest years in the 136 yearsof recordkeeping all have occurred since 2001, with theexception of 1998. Temperatures have been rising sincethe Industrial Revolution (Chart 1). According to anongoing temperature analysis conducted by scientists atNASA’s Goddard Institute for Space Studies, the averageglobal temperature on Earth has increased by about 1.4° Fsince 1880, and two-thirds of that warming has occurredsince 1975.

But does a one-degree change really matter? Consider thata one-degree global change is significant because it takes avast amount of heat to warm all the oceans, the atmosphereand the land by that much. A one- to two-degree drop wasall it took to plunge the Earth into the Little Ice Age between1300 and 1870. A five-degree drop was enough to bury alarge part of North America under a towering mass of ice20,000 years ago.

Global sea levels have been rising over the past century,according to the National Oceanic and AtmosphericAdministration, and the rate has increased in recent decades.Sea levels continue to rise at a rate of about one-eighth ofan inch per year, posing the most immediate threat tocoastal cities and towns. The two major causes of rising sealevels are thermal expansion caused by warming of the

ocean, since water expands as it warms, and increasedmelting of land-based ice, such as glaciers and ice sheets.

Melting IceThe polar ice caps continue to shrink, with the Arcticwarming at a rate twice as fast as the rest of the planet. TheArctic Ocean is expected to become essentially ice free insummer before mid-century. Large chunks of the ice shelfcovering Antarctica periodically fall off, with one, in 2017,as large as Luxembourg and another, the size of Delaware.Greenland, which is almost entirely covered in ice, has beenmelting for the past 30 years and adding about 0.027 inchesa year to global sea levels.

We saw a vivid example of a warming earth on two visits toIceland, where we explored one of the island’s massiveglaciers, Mýrdalsjökull, located in the southern highlands.To get to one of its tongues, we drove a few hours outsideof Reykjavik, turned off the main highway and proceededa few miles off the beaten path to a parking area that, onour first visit in 2013, was a little over a quarter-mile fromthe edge of the glacial ice. We hiked toward the ice, passinga massive and deep lake formed by what had already meltedin recent times.

Our guide, an Iceland resident for 20 years, informed usthat 10 years earlier, the edge of the glacier was much closerto the parking area itself. A warming climate has contributedto a receding of Iceland’s glaciers in general, he said, andwhen we returned to Mýrdalsjökull in 2016, we could seevery clearly how much more melting had occurred in theintervening three years, with the edge of the glacier tongueeven farther from the parking area and the adjacent lakeeven larger.

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HurricanesHurricane Florence in September was just the latest of a series of recentAtlantic hurricanes that devastated the U.S. and Caribbean. Maria wreakedhavoc on Puerto Rico last year and, coupled with Irma, seriously damagedSt. John, U.S.V.I. Harvey flooded Houston and its environs, making that2017 hurricane the costliest on record as it inflicted $125 billion in damages,tying it for first place with Hurricane Katrina, which devastated New Orleansin 2005 (Chart 10).

The Accumulated Cyclone Energy Index is used to account for the strength,frequency and duration of storms, and it shows that over the past 24 years,there have been 16 above-normal hurricane seasons, according to the EarthSystem Research Laboratory. The 28 named storms in 2005 were the moston record for a single year. National Hurricane Center data shows there wereabout 90 named storms in every decade from the 1900s through the 1980s.Since then, the number has increased to 110 in the 1990s, 151 in the 2000sand 131 so far in this decade (Chart 11).

Ocean TemperaturesHurricanes draw their energy from deep below theocean’s surface at depths of 2,000 meters. Thetemperature at these depths is measured by OceanHeat Content, which has risen sharply since 1970(Chart 12), according to the National Climatic DataCenter, which says the increase has been driven largelyby four of the world’s major oceans. Last year was thehottest on record. The Southern Ocean aroundAntarctica has seen the biggest rise of OHC since1970. Hurricanes in the Atlantic Ocean have increasedin strength and rapid intensification in recent decadeswhile the Pacific Ocean, the world’s largest, issignificantly warmer than in 2017.

Warmer waters have also made the speed at whichhurricanes intensify in strength faster in recent years.“Rapid Intensification” is a term used bymeteorologists to describe a storm thatincreases its maximum sustained windsby at least 35 mph within a 24-hourperiod. Between 1982 and 1994,according to the National HurricaneCenter, there were 10 cases of rapidintensification on average per year;between 2005 and 2017, that figuredoubled to 20 cases per year.

Scientists at the National Center forAtmospheric Research developed ananalysis that was published in the Journalof Climate of how 22 recent hurricaneswould be different if they formed underthe conditions that are being predicted

CHART 11Number of Named Atlantic Hurricanes and Tropical Storms

* Through mid-September 2018 Source: National Hurricane Center

1900-1909: 841910-1919: 611920-1929: 711930-1939: 1151940-1949: 981950-1959: 1041960-1969: 951970-1979: 951980-1989: 931990-1999: 1102000-2009: 1512010-present: 131*

CHART 12

Source: Climate Literacy and Energy Awareness Network

CHART 10Costliest U.S. Hurricanes

* Unadjusted $Source: National Oceanic andAtmospheric Administration

Katrina (2005)Harvey (2017)Maria (2017)Sandy (2012)Irma (2017)Ike (2008)Andrew (1992)Ivan (2004)Wilma (2005)Rita (2005)

$125.0 billion$125.0 billion

$90.0 billion$65.0 billion$50.0 billion$30.0 billion$27.0 billion$20.5 billion$19.0 billion$18.5 billion

Damage*



for the late 21st century. While each storm’s transformationwould be unique, on balance, the study found that hurricaneswould become a little stronger, a little slower-moving, anda lot wetter.

Hurricane Ike, for example, which killed more than 100people and devastated parts of the U.S. Gulf Coast in 2008,could have 13% stronger winds, move 17% slower, and be34% wetter if it formed in a warmer climate. Other stormsmight become slightly weaker or move slightly faster, butnone would become drier, the study further found, with therainfall rate of simulated future storms increasing by anaverage of 24%.

Economic EffectsThe effects of a warming planet are being clearly felt andseen now—not just during hurricane season or duringsevere and powerful winter storms. Agriculture,transportation, the economies of coastal cities, global incomeinequality, population shifts and military policy are allsubject to the rise in temperatures and sea levels and will beeven more so in future years.

1. Effects on AgricultureClimate change impacts agriculture in numerous ways asaverage temperatures, rainfall and climate extremes onboth the hot and cold ends all increase. These factors areleading to changes in atmospheric carbon dioxide andozone levels, pests and diseases and sea levels and threateningalready-vulnerable regions with more drought conditions.

As noted earlier, there are a few agricultural benefits fromwarming temperatures. But while several northern andwestern U.S. states may benefit from milder winters andlonger frost-free seasons (Chart 5), a study in the journalScience that analyzed the economic impacts of climatechange on the U.S., county by county, concluded that statesin the south and midwest could be hard hit (Chart 4).

The researchers estimated that the U.S. could face damagesworth 0.7% of GDP per year by the 2080s for every onedegree Fahrenheit rise in global temperature. And theworst-hit counties, mainly in agricultural states that alreadyhave warm climates like Texas, the Gulf Coast states andFlorida, could see losses worth 10% to 20% of GDP, ormore, if emissions continue to rise unchecked.

But a 2001 Intergovernmental Panel on Climate Changereport concluded that the world’s poorest countries wouldbe hardest hit by higher temperatures, with reductions incrop yields in most tropical and sub-tropical regions due to

decreased water availability and new or changed incidentsof insect pests.

In Africa and Latin America, many rain-fed crops are neartheir maximum temperature tolerance, meaning that yieldsare likely to drop sharply for even small climate changes.The IPCC report projects declines in agricultural productivityof up to 30% during this century and says further thatmarine life and the fishing industry will also be severelyaffected in some places.

Climate change caused by increasing greenhouse gases islikely to affect crops differently from region to region, withaverage crop yield under one scenario expected to dropdown to 50% in Pakistan while corn production in Europeis expected to grow up to 25%.

The IPCC report says a changing and warming climatecould lead to an increase in pest insect populations, harmingyields of staple crops like wheat, soybeans and corn. Insectsthat previously had only two breeding cycles per year couldgain an additional cycle, and set off a population boom, ifwarm growing seasons get longer.

Future climate change will likely negatively affect cropproduction in low-latitude countries while the outlook ismixed for those in northern latitudes, the IPCC says.Climate change will also probably increase the risk of foodinsecurity for some vulnerable groups, such as the poor. Astudy by the UN World Food Program lists food availability,access, utilization and stability as being at risk from climatechange.

A 2008 study published in Science suggested that a warmingclimate could result in southern Africa losing “more than30% of its main crop, maize, by 2030. In South Asia, lossesof many regional staples, such as rice, millet and maizecould top 10%.”

A University of Illinois study measures the effect of warmertemperatures on soybean plant growth and Japanese beetlepopulations. Warmer temperatures and elevated CO2levels were simulated for one field of soybeans while theother was left as a control. The study revealed that thesoybeans with elevated CO2 levels grew much faster andhad higher yields, but also attracted Japanese beetles at asignificantly higher rate than the control field. The beetlesin the field with increased CO2 also laid more eggs on thesoybean plants and had longer lifespans, indicating thepossibility of a rapidly-expanding population.



AfricaAfrica’s geography makes it particularly vulnerable toclimate change, the IPCC says, and 70% of the populationrely on rain-fed agriculture for their livelihoods. A reporton climate change in Tanzania says that areas that usuallyget two rainfalls in the year will probably get more, andthose that get only one rainy season will get far less. As of2005, the net result was expected to be that 33% lessmaize—Tanzania’s main crop—would be grown.

AsiaIn East and Southeast Asia, the IPCC projects crop yieldscould increase up to 20% by the middle of this century. Onthe other hand, in Central and South Asia, the projectionssuggested that yields might decrease by up to 30% over thesame time period. Taken together, the risk of hunger wasprojected to remain very high in several developing countries.

Rice-growing economies are at risk due to climate change.An analysis of rice yields by the International Rice ResearchInstitute forecasted 20% reduction in rice yields over theregion for every one-degree Celsius increase in temperature.Rice becomes sterile if exposed to temperatures above 35degrees for more than one hour during flowering andconsequently produces no grain.

Climate change could lead to decreased livestock productionin Bangladesh due to diseases, scarcity of forage, heat stressand breeding strategies.

AustraliaThe IPCC report said that without further adaptation to achanging and warming climate, the impact on Australia andNew Zealand could be “substantial.” By 2030, productionfrom agriculture and forestry was projected to decline overmuch of southern and eastern Australia and over parts ofeastern New Zealand. In New Zealand, initial benefits wereprojected close to major rivers and in western and southernareas of that country.

EuropeThe IPCC projects that in Southern Europe, climate changewould reduce crop productivity; in Central and EasternEurope, forest productivity was expected to decline; and inNorthern Europe, the initial effect of climate change wasprojected to increase crop yields.

Latin/South AmericaLivestock and grains—maize, wheat, soybeans and rice—are the major agricultural products in Latin and SouthAmerica, and IPCC forecasts that increased temperaturesand altered hydrological cycles will result in shorter growing

seasons, overall reduced biomass production and lowergrain yields. Brazil, Mexico and Argentina contribute 70%to 90% of total agricultural production in region and inthese and other dry regions, maize production is expectedto decrease. Wheat is anticipated to decrease in Brazil,Argentina and Uruguay. Livestock, which is the mainagricultural product for parts of Argentina, Uruguay,southern Brazil, Venezuela and Colombia, is also likely tobe reduced.

North AmericaThe IPCC report projects that over the first few decades ofthis century, moderate climate change would increaseaggregate yields of rain-fed agriculture by 5% to 20%, butwould vary among regions. Major challenges were projectedfor crops that are near the warm end of their suitable rangeor which depend on highly-utilized water resources.

Droughts are becoming more frequent and intense in aridand semi-arid western North America as temperatures rise,hastening the timing and magnitude of spring snow meltfloods and reducing river flow volume in summer. Anacademic study out of the Colorado State University saidthe direct effects of climate change include increased heatand water stress, altered crop phenology and disruptedsymbiotic interactions, adding that these effects may beexacerbated by climate changes in river flow, and thecombined effects are likely to reduce the abundance ofnative trees in favor of non-native herbaceous and drought-tolerant competitors and reduce the habitat quality formany native animals. Climate change effects on humanwater demand and irrigation may intensify these effects.

U.S.The U.S. Global Change Research Program in 2009,assessing studies on the impacts of climate change onagriculture in the United States, found that many crops willbenefit from increased atmospheric CO2 concentrationsand low levels of warming, but that higher levels of warmingwill negatively affect growth and yields. Extreme weatherevents will likely reduce crop yields while weeds, diseasesand insect pests will benefit from warming temperaturesand will require additional pest and weed control.

Glacier MeltingThe world’s glaciers are melting, as we saw first-hand duringour Iceland trips. The IPCC says that in the areas heavilydependent on water runoff from glaciers that melt duringthe warmer months, a continuation of the current retreatwill eventually deplete the glacial ice and substantiallyreduce or eliminate runoff. A reduction in runoff willaffect the ability to irrigate crops and will reduce summer



stream flows necessary to keep dams and reservoirsreplenished.

2. Effects on TransportationA 2016 analysis by the U.S. Environmental ProtectionAdministration concluded that climate change is likely todamage transportation infrastructure through highertemperatures, more severe storms and flooding, and higherstorm surges, affecting the reliability and capacity oftransportation systems. Coastal roads, railways, ports,tunnels and airports are vulnerable to a rise in sea level,which could lead to delays as well as temporary andpermanent closures. And the EPA study said climatechange impacts will likely increase the cost of America’stransportation systems.

Marine TransportationThe EPA study said that climate changes will likely affectmarine transportation infrastructure and logistics “in manyways, both positive and negative.” Increasing temperaturescould reduce the amount of sea ice in many importantshipping lanes, such as the Arctic and other northern areas,thus extending the shipping season and shorterning shippingdistances, as noted earlier.

It’s estimated that a sizable amount of crude oil and naturalgas deposits lie under the Arctic, and the melting of the icecap may result in claims by several nations—the U.S.,Russia and Canada, to name a few—that they have the rightto explore for those energy sources.

The EPA report says that shipping lanes experiencing a risein sea level will be able to accommodate larger ships,reducing shipping costs. But higher sea levels will also meanlower clearance under waterway bridges, and ships couldface weight restrictions as channels become too shallow.

Changes in precipitation can affect shipping in a variety ofways, the study found. Flooding could close shippingchannels, and increased runoff from extreme precipitationevents could cause silt and debris to build up, leading toshallower and less accessible channels. Channels that arenot regularly maintained or have a lower capacity to storesedimentation are more vulnerable to abrupt disruptions inservice. More severe storms could also increase disruptionsin marine travel and shipping. In areas experiencingincreasing drought, water levels could periodically decrease,limiting inland shipping on rivers.

Air TransportationPeriods of extreme heat can affect aircraft performanceand may cause airplanes to face cargo restrictions, flight

delays and cancellations, the EPA said, adding, though, thatwarmer weather in winter will reduce the need for airplanede-icing.

In the winter and spring, increased rains and flooding mayalso disrupt air travel. Severe storms can force entireairports to close, as occurred along the Gulf Coast duringHurricane Katrina in 2005 and throughout the Northeastduring Superstorm Sandy in 2012. Climate change mayincrease the frequency of such closures and the number ofairports that could be affected.

Furthermore, flooding may damage facilities, includingairstrips. Thirteen of the 47 largest U.S. airports have atleast one runway within 12 feet of sea level, making themparticularly vulnerable to coastal storm surge and inundation.For example, in the New York-New Jersey region, manycritical transportation infrastructure facilities, includingNewark and LaGuardia airports, lie within the range ofcurrent and projected 50-year coastal storm surges. Atyphoon in September caused severe runway flooding thatclosed Kansai International Airport in Osaka, Japan.

Many airstrips in Alaska are built on permafrost, butwarmer temperatures will thaw the permafrost and causethe ground to settle, potentially damaging the foundationand structure of key infrastructure. Runways and airportsmay require rebuilding, relocation, or increased maintenance,the EPA study stated.

Land TransportationHigher temperatures can cause pavement to soften andexpand, the EPA analysis said, which can lead to roadwaydamage such as potholes and put stress on bridge jointswhile heat waves can limit construction activities, particularlyin areas with high humidity. As a result, it could becomemore costly to build and maintain roads and highways.

On the other hand, certain areas may experience costsavings and improved mobility from reduced snowfall andless-frequent winter storms since warmer winters may leadto reductions in snow and ice removal, as well as saltingrequirements.

Heavier rainfalls, though, may result in flooding, whichcould disrupt traffic, delay construction activities andweaken or wash out the soil and culverts that support roads,tunnels, and bridges. Road infrastructure in coastal areasis particularly sensitive to more frequent and permanentflooding from a rise in sea levels and storm surges. TheEPA estimates that some 60,000 miles of coastal roads inthe U.S. are already exposed to flooding from coastal



storms and high waves. Furthermore, major highways incoastal areas serve as critical evacuation routes that must beprotected from flooding and damage so they may be usedfor emergencies.

In some places, warmer temperatures are projected tocause more winter precipitation to fall as rain instead ofsnow. Winter flooding could occur more frequently if thefrozen ground cannot absorb precipitation. Landslidescould also occur more frequently as saturated soils areexposed to more rainwater. Drought in areas such as theSouthwest could increase the likelihood of wildfires thatreduce visibility and threaten roads and infrastructure, theEPA report said.

3. Effects on Coastal AreasCoastal areas, particularly along the Atlantic Ocean andGulf of Mexico, are sensitive to higher sea levels, changesin the frequency and intensity of storms, increases inprecipitation and warmer ocean temperatures. Risingatmospheric concentrations of CO2 are causing the oceansto absorb more of the gas and become more acidic, whichhas significant impacts on coastal and marine ecosystems.

Accelerating sea level rise in the lower 48 states, primarilydriven by climate change, is projected to worsen tidalflooding, putting as many as 311,000 coastal homes with acollective market value of about $117.5 billion at risk ofchronic flooding within the next 30 years, according to arecent report by the Union of Concerned Scientists. Some14,000 coastal commercial properties assessed at a value ofabout $18.5 billion also are at risk during that time frame.By the end of the century, homes and businesses currentlyworth more than $1 trillion could be at risk: as many as 2.4million homes valued at approximately $912 billion and107,000 commercial properties assessed at $152 billion.

“For some communities, the potential hit to the local taxbase could be staggering,” said Kristy Dahl, senior climatescientist at UCS and a co-author of the report. “Somesmaller, more rural communities may see 30, 50, or even70% of their property tax revenue at risk due to the numberof chronically-inundated homes. Tax base erosion couldcreate particular challenges for communities alreadystruggling with high poverty rates.”

Sea LevelsSince 1901, global sea level has risen approximately eightinches. Some of the fastest rates of relative sea level risein the U.S. are occurring in areas where the land is sinking,including parts of the Gulf Coast. Coastal Louisiana hasseen its relative sea level rise by eight inches or more in the

last 50 years, which is about twice the global rate. Subsidingland in the Chesapeake Bay area worsens the effects ofrelative sea level rise, increasing the risk of flooding in cities,inhabited islands and tidal wetlands. A recent study painteda grim picture of how a powerful hurricane could slam intothe Virginia Beach area and cause a storm surge in theChesapeake that could push a wall of water 150 miles up thePotomac River to Washington, D.C. and seriously flood thelow-lying capital city.

A 2017 analysis by Climate Central listed the top 25 U.S.cities most vulnerable at present to coastal flooding. NewYork City was tops, with the next 13 on the list being citiesin Florida, including Miami, St. Petersburg, Fort Lauderdaleand Hollywood. In fact, of the 25 cities on the list, 22 werein Florida, where the average elevation is about six feetabove sea level and the Sunshine State’s highest point is amere 345 feet. That same study lists most of the same 25cities, along with Virginia Beach and Norfolk, as being mostvulnerable to coastal flooding in 2050. Low-lying Floridaand Louisiana, along with Illinois, are the three U.S. stateswith buildings that are taller than their highest naturalelevation.

The EPA report also noted that increasing populations anddevelopment along the coasts increase the vulnerability ofcoastal ecosystems to rising sea levels. “Development canblock the inland migration of wetlands in response of sealevel rise, and change the amount of sediment delivered tocoastal areas and accelerate erosion,” the report stated.Coastal Louisiana lost approximately 2,000 square miles ofwetlands in recent decades due to human alterations of theMississippi River’s sediment system and oil and waterextraction that has caused land to sink. As a result of thesechanges, wetlands do not receive enough sediment to keepup with rising seas and may no longer function as naturalbuffers to flooding. The EPA also warns that rising sealevel also increases the salinity of ground water and pushessalt water further upstream, affecting freshwater supplies.

Warming WatersCoastal waters have warmed during the last century, a trendthat’s very likely to continue—potentially by as much as 4°to 8°F. This warming may lead to big changes in coastalecosystems, the EPA warns, and affect species that inhabitthese areas.

Warming U.S. coastal waters also cause suitable habitats oftemperature-sensitive species to shift northward. Pollock,halibut, rock sole, and snow crab in Alaska and mangrovetrees in Florida are a few of the species whose habitats havealready begun to shift, the EPA report points out. And



suitable habitats of other species could also shift, becausethey cannot compete for limited resources with the southernspecies that are moving northward.

4. Effects on PopulationWhere people live influences their vulnerability to climatechange, the EPA stated in a report, noting that over the pastfour decades, U.S. population has grown rapidly in coastalareas and in the southern and western regions. “These areasare most sensitive to coastal storms, drought, air pollution,and heat waves,” the report stated. Populations in theMountain West will likely face water shortages and increasedwildfires in the future while Arctic residents will likelyexperience problems caused by thawing permafrost andreduced sea ice—although winter temperatures will be lessintense. Along the coasts and across the western UnitedStates, both increasing population and changes in climateplace growing demands on transportation, water, andenergy infrastructure.

Aging PopulationClimate change will impact people in varying ways. Thoseliving in poverty may have a difficult time coping withchanges, the EPA report stated, since they have limitedfinancial resources to cope with heat, relocate or evacuate,or respond to increases in food costs. Older adults may beamong the least able to cope with impacts of climatechange. This population is particularly prone to heat stress,says the Centers for Disease Control. Older residents makeup a larger share of the population in warmer areas of theUnited States that will likely experience higher temperatures,tropical storms or extended droughts in the future, i.e.,Florida, the Carolinas, the Gulf Coast and the Southwest,and in some cases their only option may be to move backnorth—or not move south when retiring. Young childrenare another sensitive age group since their immune systemand other bodily systems are still developing and they relyon others to care for them in disaster situations.

Urban DwellersIt's estimated that about two-thirds of the U.S. populationlive in urban areas that are sensitive to climate change. Forone, heat waves can be amplified in cities because citiesabsorb more heat during the day than suburban and ruralareas. As a result, increases in heat waves, drought orviolent storms in cities would affect a larger number ofpeople than in suburban or rural areas. City dwellers mayalso be particularly susceptible to vulnerabilities in aginginfrastructure, including drainage and sewer systems, floodand storm protection assets, transportation systems andpower supply during periods of peak demand, whichtypically occur during summer heat waves.

Population on the MoveA 2012 report by Population Action International notedthat while people have always moved from place to placein search of greater opportunity, “climate change is expectedto trigger larger and more complex waves of humanmigration.” Estimates of future “climate migrants” rangefrom 200 million to 1 billion by 2050.

Climate change is considered a “threat multiplier” byexperts in the security community, and climate-inducedmass migration can contribute to heightened tension in theworld. Impaired access to food and water and severeweather are challenges that have historically led to tensionand conflict. As more and more people are displaced orcompelled to migrate in the face of these challenges,political, ethnic and religious tensions may result, the reportwarns.

Population displacement due to climate change will takedifferent forms and require different responses. Millionsmay be forcibly displaced in response to climate events suchas floods, extreme weather and rises in sea levels, whichover time could render entire populations stateless, the PAIreport states. Others will migrate due to more gradualchanges such as shifting temperature and rainfall patternsthat affect water supply and agricultural production.

A new World Bank report projects that tens to hundredsof millions of people fleeing the gradual effects of climatechange will shift centers of population within manycountries in Latin America, South Asia and sub-SaharanAfrica. If greenhouse gas emissions remain high, as manyas 143 million “internal migrants” might move within theirown countries, the report says, comprising as much as 3.5%of the total population of those regions by 2050, and thatmovement of people could accelerate after 2050. Manywill relocate within their countries from lowlands to higherground, forced to move by rising sea levels and stormsurges along with lowered crop productivity due toincreasing heat and declining water availability.

Researchers from Penn State University, the University ofNorth Carolina-Chapel Hill and the International FoodPolicy Research Institute, in a study published in GlobalEnvironmental Change, examined the effects of climatechange on human migration in South America, and foundthat abnormally high and low temperatures increased theneed to migrate to more favorable climates.

In the U.S., states like Arizona, Texas, the Gulf Coast statesand Florida that are already in hot locales could see amigration to the north as temperatures rise. Matthew



Kahn, an economist at the University of Southern California,said that if Arizona becomes unbearable because of risingtemperatures, more people may decide to move to stateslike Oregon or Montana, which would largely escapeintolerable heat waves and could even see an increase inagricultural production.

5. Effects on Income InequalityIn a report published last year in the journal Science,researchers examining the impact of climate change on theU.S. warned that “climate change tends to increase pre-existing inequality.” Climate change will aggravate already-widening economic inequality in the U.S., essentiallytransferring wealth from poor areas in the Southeast andthe Midwest to well-off communities in the Northeast andon the coasts, as discussed earlier (Chart 4).

Some of the poorest regions of the country could see thelargest economic losses, particularly in the Southeast, whilestates the Northeast and West would fare relatively well.The U.S. could face damages worth 0.7% of GDP per year

CHART 13

Source: Energy Information Administration, State Energy Data System and Business Insider

by the 2080s for every 1 degree Fahrenheit rise in globaltemperature, the study warns, with the worst-hit counties —mainly in states that already have warm climates, likeArizona or Texas — seeing losses worth 10% to 20% ofG.D.P. or more if greenhouse gas emissions continue to riseunchecked. Stating the obvious, one of the study’s authorsexplained: “The reason for that is fairly well understood: Arise in temperatures is a lot more damaging if you’re livingin a place that’s already hot.”

EuropeThe outlook is similar in Europe where the fight againstclimate change and rising temperatures are taking the formof carbon taxes and public programs to encourage thedeployment of cleaner technologies. These policies will notonly have an impact on the overall economy, but willdisproportionately favor the wealthier end of the population.Poorer households that cannot afford expensive newelectric vehicles, for instance, will be forced to pay substantialcarbon taxes for using their old gas-guzzling and air-polluting vehicles. One observer pointed out the irony ofgovernments using the fuel-tax revenue paid by the lower



economic strata to subsidize wealthier households buying aTesla.

Poorer people and families in Europe typically don’t ownhouses and therefore cannot actively invest in publicly-subsidized solar panels, energy-efficiency measures or carcharging stations. And even if they own houses, they do nothave access to capital to finance these additional investments.As a result, poorer Europeans will pay an increasing shareof their low income on pollution penalties while richerhouseholds can afford to invest in switching away fromfossil fuels to avoid paying higher carbon taxes. Thus, thecost of increasingly aggressive climate policies instituted bygovernments on the Continent would fall disproportionatelyon poorer households.

6. Effects on Military PolicyThe U.S. military, not exactly a bastion on dreamy-eyedliberal ideology, nonetheless has been aware of the risks ofclimate change for the past several decades. In a reportfour years ago, the Department of Defense said climatechange poses “immediate risks” to national security and willhave broad and costly impacts on the way the U.S. militarycarries out its missions. Indeed, military planners have beenactively working for a number of years already to avoid andadapt to the worst effects of climate change, includingflooding, extreme heat, extreme weather and more.

Rising seas could have profound effects on militaryoperations. A 2016 report conducted by a military expertpanel and published by the Center for Climate andSecurity Policy Institute found that rising sea levels couldflood parts of military bases along the East and Gulf coastsfor up to three months a year as soon as 2050, somethingthat could affect military infrastructure, training andoperations. Sea level increases and storm surges couldinterfere with amphibious landings and navigational safety,and cause power outages that affect transportation, commandand control and intelligence centers.

Globally, rising sea levels will cause more flooding andcould also displace populations in many regions, promptmass migrations and destabilize vulnerable countries, asnoted earlier, and result in the U.S. military increasinglybeing called upon to provide humanitarian aid or disasterrelief.

Rising temperatures and more extreme weather will threatenmilitary training, disrupt supply chains, result in higherheating and cooling costs, and could affect intelligence,surveillance and reconnaissance capabilities, the study said.Warmer temperatures will increase the incidence of pestsand diseases, stress land and water resources, and exacerbate

health and safety risks for military personnel around theworld. Extreme weather will also mean more maintenanceand repair for runways and roads, infrastructure andequipment.

Arctic RegionWith the Arctic warming up much faster than the rest of theplanet, the melting of sea ice is opening the Arctic Ocean upto new opportunities for oil and gas exploration, fishing andtourism—and conflicts between nations operating in theregion. This will make it necessary for the U.S. military tobe active in the area to ensure the free passage of ships, thesafety of people working there and the protection of theenvironment.

Furthermore, a warming planet and an Arctic region newlyaccessible to ships will result in new military strategies fortransporting troops, fighting wars and mapping out supplychains.

7. What Are States Doing?Trump has announced plans to pull the U.S. out of the 2015Paris accord, that aims to keep global temperatures fromrising more than 2o Celsius, and has shrugged off the issueas nothing more than a Chinese hoax. Meanwhile, his EPAseems fairly uninterested in the matter as it deregulatespolluting industries.

The states have thus taken the reins in addressing and tryingto combat climate change. Eleven states, plus Washington,D.C. and Puerto Rico, are pursuing policies that will upholdthe country’s commitments to the accord. They’ve joinedthe United States Climate Alliance, a bipartisan group thatseeks to reduce greenhouse-gas emissions nationwide (Chart13, opposite page). Another unnamed group, which includesdozens of cities, university presidents and business leaders,also pledged to work towards the emissions reduction goalsthat the U.S. set as part of the accord.

California last month enacted a law to mandate carbon-freeelectricity by 2045. Twenty states, some one hundred citiesand a thousand companies have already set targets forreducing the greenhouse effect, according to America’sPledge, an initiative launched by former New York mayorMichael Bloomberg and California Governor Jerry Brown.

Last year, the We Are Still In group was launched inresponse to Trump’s withdrawal from the Paris Agreement.This coalition, which numbers more than 3,500 institutionsacross government, the private sector, faith communitiesand higher education institutions in all 50 states, aims toreduce emissions in their states, businesses, and institutionsby pushing for compliance with the Paris Agreement.



CommentaryRudolph vs. Mr. Rogers

December is the Holiday Season. Itused to be called the Christmas Seasonbut retailers substituted “Holiday” tonot offend non-Christians.Furthermore, the 12 days ofChristmas don’t start until December25 and run until January 6. In theWestern Christian calendar,December is the season of Advent.It’s my favorite season, and it has tobe for a career-long forecaster sincein Advent, we look forward—forward—to the birth of Jesus and tohis Second Coming.

For most Americans, there’s little leftof the Christian significance ofChristmas as it’s become the seasonof mass retailing. “Black Friday” is sonamed because it’s the day retailerscover their cumulative costs for theyear and their profits move into theblack. Cyber Monday might as wellbe a holiday for many since theyspend most of their time orderingonline.

Even in Christian tradition, Christmasnever ranked with Good Friday,Easter or Pentecost when the HolySpirit arrived to replace the physicalJesus in Christians’ lives. The rise ofChristmas as a secular holiday,focused on family and friends, led thePuritans in England and New Englandto ban its observance.

The Gospel of Mark, the earliestwritten, as well as John’s don’t evenmention Christmas. As far as gift-giving, Jesus was God’s gift to mankindbut human gifts originated with theWise Men, and their gifts of gold,frankincense and myrrh arecelebrated not on Christmas, but onEpiphany, January 6. And gift-givingonly started in the 15th century.

Still, despite the commercialism, whocan complain about the warm seasonal

spirit and 20 more HallmarkChristmas movies? Nevertheless,some aspects of today’s Christmascelebration are downright anti-Christian. Read carefully the wordsof the popular Christmas song,“Rudolph the Red Nosed Reindeer.”

Rudolph, the red-nosed reindeerhad a very shiny noseand if you ever saw it

you would even say it glows.

All of the other reindeerused to laugh and call him names

They never let poor Rudolphplay in any reindeer games.

Then one foggy Christmas eveSanta came to say:

“Rudolph with your nose so bright,won’t you guide my sleigh tonight?”

Then all the reindeer loved himas they shouted out with glee,

Rudolph the red-nosed reindeer,you’ll go down in history!

The other reindeer mocked Rudolphbecause he was different and theydidn’t accept him as he was. Onlyafter he saved Santa one foggyChristmas Eve was he not onlyaccepted, but celebrated. In contrast,a basic belief of Christianity is thateach of us matters, that God acceptsus as we are, warts and all.

Fortunately, Mr. Rogers emphasizedthis conviction, as we’re all remindedwith the new movie, “Won’t You BeMy Neighbor?” Fred Rogersgraduated from PittsburghTheological Seminary and was atrained composer and pianist, butwasn’t an ordained minister.

“Mister Rogers Neighborhood,” firstbroadcast on public television in 1968,always began with him singing, “It’s abeautiful day in the neighborhood”and “Won’t you please? Won’t youplease? Please won’t you be myneighbor?”

His low-key friendliness was infectiousbut he wasn’t shy about being a rolemodel or a benevolent authority figure.He encouraged children to talkhonestly about their emotions and totrust the people with whom they sharedthem.

He emphasized the specialness ofeveryone—that fundamentalChristian belief—and had anunwavering commitment to the valueof kindness in a world that seemsintent on devising new ways to bemean. He told his viewers, “Youmake each day a special day. Youknow how, by just your being you.There’s only one person in this wholeworld like you. And people can likeyou exactly as you are.”

Mr. Rogers took his young viewers bytrolley to the Neighborhood of Make-Believe, inhabited by his puppet alteregos, but then always returned themto reality at the end of his show.When they were young, our four kidswere mesmerized by Mr. Rogers, andmy wife and I believe it gave themconfidence as they began to realizethat the world is a very competitiveplace where kindness and respect forothers is often in short supply.

Commercial TV pursued Mr. Rogersand his increasingly popular publicTV show but he refused to riskinterference with his fundamentalmessage to children. He died ofstomach cancer in 2003 at age 74, butfortunately after being awarded thePresidential Medal of Freedom, thenation’s highest civilian honor.

As we move from Advent toChristmas, I hope you’ll minimize thecommercialism and certainly thereindeers’ hero worship of Rudolph.Instead, concentrate on the love ofGod as shown by the birth of Jesusand witnessed by Mr. Rogers.

a. gary shilling ˇs insight - cumbers-insight... · june 2018 a. gary shilling's insight 1...

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