Streetwise Professor

August 10, 2015

Destroying Seized Food: Compounding Idiocy With Lunacy

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 5:59 pm

Russia cemented its well-deserved reputation for insanity by bulldozing and burning tons of food seized for violating the country’s cut-off-its-nose-to-spite-its-face import ban. This was daft, even overlooking the foolishness of the ban.

Seizing smuggled foodstuffs raises the cost of violating the ban, thereby achieving a deterrent effect. But what’s the point of destroying what was seized? Selling it would make much more sense. First, selling would actually help strengthen the ban by increasing supply and reducing prices in Russia, thereby reducing the profitability of smuggling. This would have also increased Russian consumption, making Russians better off. Second, the Russian government could realize revenue by selling the confiscated products: God knows it can use every ruble it can get. Or it could just give the stuff away, and get a PR victory as well as reducing the incentive to smuggle.

In other words, no economic downside, and some economic upside (assuming the ban is rational).

Instead, the Russian government engaged in exhibitionist masochism, and destroyed the seized items in a very public and flamboyant way.

Why? Beats me. Maybe they were trying to make the point that Russia needs nothing from the decadent West. Or maybe they are in thrall to the broken window fallacy, and believe that destroying stimulates production.

I really don’t want to understand. Because to understand these lunatics, I would probably have to descend into lunacy myself.

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Gazprom Has Unprotected Sales, And Pays the Price

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:40 pm

I have long mocked Gazprom’s obstreperous, and economically unhinged, defense of an oil price peg of its gas sales. So today is another schadenfreude day, as the FT reports that Gazprom’s vaunted gas deal with China is finding that The East is Red (as in ink) because the price was linked to oil and “offers no protection against low [oil] prices.” (And despite the evident risks of going without protection, Russia is contemplating a ban on foreign condoms! Maybe Gazprom needs to be more “strict and discriminating” in its contracting practices.)

Apparently the company took strategic advice from Obama, who when asked by Fareed Zakaria what would happen if the Iran deal failed, said that “I have a general policy in big issues like this not to anticipate failure“:

Asked whether the contract built in protections to ensure that Gazprom would not make a loss in the event of a prolonged period of low oil prices, Pavel Oderov, a director at the company, said: “We have registered high risk appetite for this contract and we do not envisage such an event.”

By “high risk appetite,” I think he meant: “we were freaking desperate and we put it all on black (as in oil) to gamble for resurrection.”

And of course, Putin can’t let Gazprom eat a loss:

Separately, the Russian government is preparing to support the flagship project. According to a document published by the Kremlin on Monday, president Vladimir Putin ordered the Russian government to draw up by the start of September a “comprehensive action plan to ensure government support for the construction of gas transport infrastructure, including the Power of Siberia pipeline”.

Like the Russian government has money to throw around, especially since Gazprom (and Rosneft) are supposed to be the cash cows that feed the rest of its corrupt cronies, and the budget.

Insisting on the oil peg was always nuts. Note that one reason why many buyers of LNG want to move away from the oil-link is to diversify their price risk: that’s exactly why Russia, already a huge oil long, should have jumped at the chance to move away from a 100 percent reliance on oil price linkages. Yes, oil and gas prices are correlated, but imperfectly so, and moving away from oil-based pricing for gas would have reduced the country’s exposure to oil prices. But apparently Gazprom management and Putin believed that oil would always outperform gas, and insisted on the link. Be careful what you ask for, Vlad!

This is just the latest in a litany of Gazprom failures. Along with today’s bad news about the China contract-the cornerstone of Putin’s vaunted pivot to Asia-the company disclosed that production was down and sales to Europe were down in the first quarter. The company’s ruble profits rose only because the ruble cratered: talk about the cloud engulfing the silver lining. Further, the Turkish Stream project appears dead in the water, foundering upon-you guessed it-the inability to negotiate a price. That, and the cracked economic rationale for the project.

The world is finally awakening to the fact that the alleged energy behemoth is in fact an economically incoherent mess. In the US, it would have been taken over, and ruthlessly rationalized. Or put into rehab. Or broken up. But Putin continues to let it blunder on, like a vodka-sotted giant.

Not so long ago, Putin was considered some sort of virtuoso. He apparently thought so too. But now everything that used to work for him is self-destructing. And he seems quite bewildered at his turn of fortune.

In truth, Putin was not a virtuoso: he confused luck–high oil prices–for some sort of strategic genius. He was a huge spec long on oil, and looked brilliant when the price was high. When it is low, not so much. And idiotically, one of his champions insisted on increasing that exposure instead of diversifying away from it.

Well played. Well played.

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August 3, 2015

Adding to Atlas’s Burden: The EPA’s CO2 Rule

Filed under: Climate Change,Commodities,Economics,Energy,Politics,Regulation — The Professor @ 6:41 pm

Acting under the aegis of its most malign agency, the EPA, in its unbending effort to hamstring the US economy, the Obama administration today released its long dreaded CO2 rule. The Rule mandates a 32 percent decrease in CO2 emissions by 2030. This outcome will be achieved by a dramatic reduction in the use of coal powered generation, and its replacement by renewables.

The administration touts its generosity by pointing out that compliance with the Rule has been extended by 2 years.

Great. We get screwed in 7 years, instead of just 5. Gee. Thanks. How thoughtful. You really shouldn’t have.

The Rule is tarted up with a cost-benefit analysis which purports to show massive benefits and modest costs. The benefit is in the form of improved health, in particular through the reduction in respiratory ailments.

But every step of this analysis is literally incredible. Consider the steps. First is an estimate of how the regulation affects climate. The second is an estimate of how climate affects health. The third is an estimate of the value of these health benefits. None of these calculations is remotely plausible, or even is it plausible that they can be made realistically, given the incredible complexity of climate and health.

And note the bait and switch here. The Rule is touted as a solution to the Phenomenon Once Known As Global Warming. But the Rule itself admits that the effect on temperature will be point zero one eight degrees centigrade by 2100. This is effectively zero, meaning that the “Climate Change” benefit of the Rule is zero.

The health benefits come from reductions in particulates from coal generating plants. So why not regulate particulates specifically?

This all points out that cost benefit analysis for large federal rules is basically Kabuki theater. Some laws require this analysis, but since courts give so much deference (under Chevron) to agencies, that this analysis is not subject to any serious scrutiny. Consequently, the process is ritual, not a serious check on agency discretion.

The Rule is grotesquely inefficient even if you believe this Making Shit Up And Calling it Science!® “cost-benefit analysis.” An efficient rule would achieve its results at lowest cost. But the command-and-control EPA rule does not do this.

Originally, the Rule was expected to lead to a substitution of natural gas for coal. But we can’t have that, can we, given that natural gas is a fossil fuel (even if Nancy Pelosi doesn’t think so)? So the current rule encourages the use of renewables.

The economics of renewables (especially wind) are atrocious. They are intermittent and diffuse. Intermittency strains reliability, and requires maintaining backup generation. Germany (and other countries, including Spain) have gone all in on renewables, and it has been a disaster. Energiewende has saddled Germany with high costs and lower quality power that has imposed great costs on German manufacturing. (Fluctuations in wind and sunlight induce fluctuations in frequency that wreak havoc with precision manufacturing processes.) California is already on the verge of reliability problems when the sun sets during winter months due to a sudden drop in solar generation (aka the swan problem) that requires a sudden ramp up of conventional generation: but the supply of solar during daylight hours undermines the economics of conventional generation. Wind power in Texas is leading to frequent bouts of negative prices which reduce the profitability of conventional generation necessary to maintain reliability.

The Rule acknowledges reliability issues, but the response is totally inadequate:

[T]he rule requires states to address reliability in their state plans. The final rule also provides a “reliability safety valve” to address any reliability challenges that arise on a case-by-case basis.

That’s just great. EPA says: “Yeah, we know renewables create reliability issues. Not our problem! You figure it out, states.” Note that this is problematic because the electrical grid is interconnected, meaning that retiring a coal plant in one state can have serious effects on reliability in numerous other states. So how do individual state plans efficiently address these inherently interstate issues? And as for the “safety valve”, the case-by-case analysis is likely to be cumbersome and costly.

Let’s get down to cases. By its own calculations, the proposed Rule will have a risible effect on global temperature. Therefore, there is no cost benefit justification for the control of CO2 per se, the ostensible purpose of the rule. If there are substantial benefits from reducing particulate emissions, then tax these emissions at a rate commensurate with these costs and let utilities and others find the most economical way of complying.

But that’s not the point, is it? Obama and the EPA don’t want efficiency. They have an intense ideological animus against fossil fuels, and a romantic attachment to renewables: many of the Democrats’ largest donors are have a strong investment in renewables. Pigouvian approaches would likely result in the failure to litter the landscape with bird blending windmills and massive solar panels, so they prefer command and control approaches instead.

And did I mention that Obama insinuated that if you oppose the Rule you are racist?

This new Rule is a piece with the last 6 plus years of grotesquely inefficient legislation and regulations. Frankendodd. Obamacare. Net Neutrality. Each of these add huge amounts of new weight that the Atlas of the American economy must bear. An economy subjected to such burdens will survive, but it will not thrive. The EPA’s new Rule will provide no meaningful benefit, and any benefits that it does generate will be gained at excessive cost. But that is the Obama way. That is the leftist way.

 

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July 22, 2015

Vlad’s Pivot to Oblivion

Filed under: China,Commodities,Economics,Energy,Politics,Russia — The Professor @ 7:09 pm

This story is a Sino-Russian twofer:

The contract between Russia and China for gas supplied via the western route known as Power of Siberia-2 is being delayed indefinitely, Vedomosti cited Russian officials. They say China is reviewing its energy needs due to the economic slowdown.

The demand growth for gas in China is slowing, at the same time access to liquefied natural gas (LNG) is becoming more available in the country, for example from Australia, due to the fall in oil prices, Sberbank CIB analyst Valery Nesterov told Vedomosti on Wednesday.

Repeat after me: Gazprom finalizes about one out of a hundred of the vapor deals it announces. This is especially true where China is involved.

There are three basic problems. First, the pipeline is expensive, primarily because the Russians insist on building it. After all, how else could they tunnel out money? And if they can’t tunnel out money, what the hell is Gazprom good for?

“Gazprom offers CNPC a high price, explaining this by the high cost of the Power of Siberia – 2 construction. China is ready to build the pipeline at a cheaper cost and at public tender, so its companies could participate and for the construction price to be transparent,” the president of the Russia-China analytical center Sergei Sanakoyev said.

Second, the pipeline would go to the western part of China, which is convenient for Gazprom, but it isn’t where China needs the gas.

Third, China doesn’t need as much gas period, because (a) new (LNG) supply is coming on line in Australia, and (b) despite the happy talk of official statistics, every indication is that the Chinese economy is slowing:

The demand growth for gas in China is slowing, at the same time access to liquefied natural gas (LNG) is becoming more available in the country, for example from Australia, due to the fall in oil prices, Sberbank CIB analyst Valery Nesterov told Vedomosti on Wednesday.

So how’s that pivot to Asia working out, Vladimir? Timing is everything in life, and Putin is counting on China precisely when China has its own issues to deal with. If China was continuing to power forward, Putin’s pivot would have turned him into China’s pilot fish. Now even being a pilot fish looks out of reach.

To all those who hyperventilated at the announcements of huge Sino-Russian gas deals: when will you people learn to discount virtually anything Gazprom says down to just above zero? That’s especially true when there was a huge political reason for Putin to hype such a deal. I guess suckers never learn.

The second part of the twofer here is the further evidence it provides of China’s economic troubles. Look at the commodity carnage going around: oil, copper, iron ore, gold, platinum, you name it are in the dumper. China put them there. This is just another pixel in the image.

 

 

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July 13, 2015

Chronicles of Hillary, Book the First: Kabuki, Not Conviction

Filed under: Commodities,Economics,Politics — The Professor @ 7:16 pm

This is, alas, likely to be a long running saga, hence the title: if we are lucky, the chronicles will end no later than 16 months from now. We can only hope.

Today Hillary gave a Big Speech on the economy. She channeled her inner Elizabeth Warren, and blasted Wall Street, big banks, hedge funds, short-termism and other easy targets.

You knew it was Kabuki, not conviction, from the very first: Hillary was introduced for her bankster bashing speech by leading bankster Lloyd Blankstein of Goldman Sachs. If Blankfein was truly threatened by Hillary, he wouldn’t have been embracing her, literally.

And of course, for all of Hillary’s leftist red meat, she has long been quite intimate with Wall Street. She has long milked The Street for campaign contributions and other boodle like it was a prize holstein. Most notably, Hillary was a very solicitous junior senator from NY, and in exchange for very generous financial support, she did Wall Street’s bidding. No Warren-esque rhetoric then, in those halcyon pre-Crisis years.

Further, Hillary has personal experience with hedge funds. Her son-in-law (about whom she presumably corresponded on her secret server in now-deleted emails) runs a hedge fund. More tellingly, Hillary held a million dollar investment in a hedge fund which just so happened to short medical stocks while she was on the campaign trail blasting the pharmaceutical industry and promising thoroughgoing health care reform. In other words, Hillary was an investor in hedge funds before she was against them.

Hillary declaimed today against Too Big to Fail. I guess I will have to give her a pass on this: her experience  is with small, crooked, insolvent ditchwater S&Ls in Dogpatch, not big banks in Gotham.

 

And insofar as short-termism is concerned, who can forget the Miracle of the Cattle Futures, in which Hillary turned some short-term profits totaling around $100 grand, based (in her telling) on her discerning reading of the WSJ? Which has always had crappy commodities coverage.

Hillary, in other words, is wildly implausible as an anti-Wall Street crusader. It is transparently the case that this is something that polls well, especially among Democratic primary voters, so she will play that part.

Hillary’s complementary theme is that she will fight for middle America. Yet more kabuki. You know Hillary detests her middle class upbringing in Park Ridge, IL, and has spent her entire life distancing herself from it. The years in Arkansas were like purgatory. Whenever Hillary subjects herself to the actual presence of middle class Americans, it is plainly evident that she would much rather be undergoing a root canal, but for the fact that a root canal won’t advance her vaulting political ambitions. The trials she endures!

Insofar as policy is concerned, Hillary served up a dog’s breakfast of tedious progressive proposals. The most amusing of these was a swipe at Uber and Airbnb, further evidence that alleged progressives are actually the enemies of disruptive technologies that undermine (politically-connected) incumbents: they are the party of stasis, not progress. (The losers from Uber are not working stiff cabbies, who make their reservation wage, but the owners of government-rationed taxi medallions.) She also paid obeisance to the sacred cow of “infrastructure,” advocating the creation of an infrastructure bank (which would direct resources to the politically connected rather than the economically productive). She also had a flashback to the 60s-70s infatuation with corporate profit sharing, which she said her administration would “encourage.” If profit sharing is indeed mutually beneficial, Hillary’s encouragement is hardly needed. If it isn’t, such encouragement would be detrimental.

All in all, a paint-by-progressive-numbers performance intended to shore up her left flank. It was classic Hillary-banal, and as authentic as Velveeta.

And just think, we have at least a year to put up with the tripe. Just pray its not 5 plus-or 9 plus-years.

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July 12, 2015

Gazprom Struggles. And There Was Much Rejoicing.

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 7:18 pm

Surprise, surprise, surprise. The vaunted Russia-Turkey gas pipeline deal is not really a deal. The reason-brace yourself against the shock-is that the two sides can’t come to an agreement over price:

Russia’s plan to build a new $15 billion pipeline to Turkey is at risk of delay because of a fight over gas prices, according to people with knowledge of the matter.

State-run OAO Gazprom and its Turkish counterpart Botas had a six-month period to agree on prices for gas supplies between the two countries, which expired on Monday. The Ankara-based company now has the right to take the matter to international arbitration, three of the people said, asking not to be named because the information is private.

The dispute over prices means there’s no immediate prospect of signing a binding pact for the new pipeline, the second between Russia and Turkey. An agreement could now be delayed until at least October, two more people said, also asking not to be identified.

I was about as surprised about this as I was to see the sun rising in the east this morning.

Remember: Gazprom consummates maybe one percent of the “deals” that it announces. And the deals founder on price. Almost every time.

By the way, this totally demolishes the alleged pipeline deal between Russia and Greece, because the Grecian pipeline was intended to carry gas that Russia had shipped to Turkey on to Europe.

Not that the $2-odd billion pipeline deal would have been more than spit in the ocean of Greece’s debt problem: the Greek government would only realize a fraction of the $2+ billion, many years from now. And as things look now, never.

In other Gazprom news, apparently the company is stiffing Turkmenistan:

Turkmenistan, irked by falling natural gas exports to Russia, hit out at Moscow’s gas export monopoly Gazprom on Wednesday, saying the energy giant had not paid for gas purchased from the Central Asian country so far this year.

“Since the beginning of 2015, OAO Gazprom has not paid for its debts to state concern Turkmengas for the shipped volumes of Turkmen natural gas,” Turkmenistan’s Oil and Gas Ministry said in a statement on its official website (www.oilgas.gov.tm).

Could be worse. Gazprom could have blown up the pipeline.

This suggests that Gazprom is having some major cash flow problems.

And who says there is no good news?

 

 

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July 2, 2015

See You In the Funny Papers

Filed under: Clearing,Commodities,Derivatives,Economics,Exchanges — The Professor @ 6:01 pm

Here’s a first. I appear in a comic strip history of the CME-ICE rivalry in Bloomberg Markets Magazine. Quite the likeness!

Other than the fact that I appeared at all, the most amusing part of the, er, article, is the panel depicting CME’s Terry Duffy getting the news that ICE was making a rival bid for CBOT via a note slipped under his hotel room door at the FIA at Boca at 0600. I had eaten dinner with Duffy and CME CEO Craig Donohue the night before. They were in a little better mood then than they were the next day.

Bloomberg’s Matt Leising called me at about 0630 to ask me about the development. That led to an appearance on Bloomberg TV, where I was interviewed right before Jeff Sprecher. He watched me give the interview, and was not pleased with my prediction that CME would eventually prevail, but have to pay a lot more: I saw him say to the woman next to him (who I later found out was his wife, Kelly Loeffler) “who is this guy?” That was exactly how it worked out though, and apparently there were no hard feelings because Sprecher spoke at a conference I organized at UH a couple of years later. Either that, or he didn’t connect me with “this guy.”

Evenhanded guy that I am, I invited Craig Donohue to speak at a conference a year or two after that. His speech was interrupted by some Occupy types (remember them?), whom my tiger of an assistant Avani and I bodily shoved out of the room while the rest of the audience sat in stunned silence (not knowing what was going on).

So yeah. My involvement with CME and ICE sometimes does sound like something out of the funny pages. Now it’s official.

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June 15, 2015

Always Follow the Price Signals. I Did on Brent-WTI.

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:18 pm

As a blogger, I am long the option to point out when I call one right. Of course, I am short the option for you all to point out when I call one wrong, but I can’t help it if that option is usually so far out of the money (or if you don’t exercise it when it is in) 😉

I will exercise my option today, after reading this article by Greg Meyer in the FT:

West Texas Intermediate crude, once derided as a broken oil benchmark, is enjoying a comeback.

Volumes of futures tracking the yardstick have averaged 1m contracts a day this year through May, up more than 45 per cent from the same period of 2014, exchange data show. WTI has also sped ahead of volumes in rival Brent crude, less than two years after Brent unseated WTI as the most heavily traded oil futures market.

. . . .

WTI has also regained a more stable connection with global oil prices after suffering glaring discounts because of transport constraints at its delivery point of Cushing, Oklahoma. The gap led some to question WTI as a useful gauge of oil prices.

“I guess the death of the WTI contract was greatly exaggerated,” said Andy Lipow of consultancy Lipow Oil Associates.

But in the past two years, new pipeline capacity of more than 1m barrels a day has relinked Cushing to the US Gulf of Mexico coast, narrowing the discount between Brent and WTI to less than $4 a barrel.

Mark Vonderheide, managing partner of Geneva Energy Markets, a New York trading firm, said: “With WTI once again well connected to the global market, there is renewed interest from hedgers outside the US to trade it. When the spread between WTI and Brent was more than $20 and moving fast, WTI was much more difficult to trade.”

Things have played out exactly as I forecast in August, 2011:

One of the leading crude oil futures contracts–CME Group’s WTI–has been the subject of a drumbeat of criticism for months due to the divergence of WTI prices in Cushing from prices at the Gulf, and from the price of the other main oil benchmark–Brent.  But whereas WTI’s problem is one of logistics that is in the process of being addressed, Brent’s issues are more fundamental ones related to adequate supply, and less amenable to correction.

Indeed, WTI’s “problem” is actually the kind an exchange would like to have.  The divergence between WTI prices in the Midcontinent and waterborne crude prices reflects a surge of production in Canada and North Dakota.  Pipelines are currently lacking to ship this crude to the Gulf of Mexico, and Midcon refineries are running close to full capacity, meaning that the additional supply is backing up in Cushing and depressing prices.

But the yawning gap between the Cushing price at prices at the Gulf is sending a signal that more transportation capacity is needed, and the market is responding with alacrity.  If only the regulators were similarly speedy.

. . . .

Which means that those who are crowing about Brent today, and heaping scorn on WTI, will be begging for WTI’s problems in a few years.  For by then, WTI’s issues will be fixed, and it will be sitting astride a robust flow of oil tightly interconnected with the nexus of world oil trading.  But the Brent contract will be an inverted paper pyramid, resting on a thinner and thinner point of crude production.  There will be gains from trade–large ones–from redesigning the contract, but the difficulties of negotiating an agreement among numerous big players will prove nigh on to impossible to surmount.  Moreover, there will be no single regulator in a single jurisdiction that can bang heads together (for yes, that is needed sometimes) and cajole the parties toward agreement.

So Brent boosters, enjoy your laugh while it lasts.  It won’t last long, and remember, he who laughs last laughs best.

This really wasn’t that hard a call to make. The price signals were obvious, and its always safe to bet on market participants responding to price signals. That’s exactly what happened. The only surprising thing is that so few publicly employed this logic to predict that the disconnection between WTI and ocean borne crude prices would be self-correcting.

Speaking of not enjoying the laugh, the exchange where Brent is traded-ICE-issued a rather churlish statement:

Atlanta-based ICE blamed the shift on “increased volatility in WTI crude oil prices relative to Brent crude oil prices, which drove more trading by non-commercial firms in WTI, as well as increased financial incentive schemes offered by competitors”.

The first part of this statement is rather incomprehensible. Re-linking WTI improved the contract’s effectiveness as a hedge for crude outside the Mid-continent (PADD 2), which allowed hedgers to take advantage of the WTI liquidity pool, which in turn attracted more speculative interest.

Right now the only potential source of disconnect is the export ban. That is, markets corrected the infrastructure bottleneck, but politics has failed to correct the regulatory bottleneck. When that will happen, I am not so foolish to predict.

 

 

 

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June 13, 2015

Definitive Proof That The New York Times’ David Kocieniewski Is A Total Moron*

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 6:06 pm

Not that further proof is needed, but still.

You may recall that NYT “reporter” (and by “reporter,” I mean “hack”) David Kocieniewski slimed me on the front page of the NYT on 31 December, 2013. In a nutshell, Kocieniewski accused me of being in the pocket of oil traders, and that this had led me to skew my research and policy positions. Specifically, he insinuated that I opposed position limits and defended speculation in energy markets because I had been suborned by oil traders who profited from high prices, like those that occurred in 2008 (before the crash). Kocieniewski’s main piece of “evidence” was that I had written a white paper sponsored by Trafigura. According to Kocieniewski, as an oil trader, Trafigura benefited from high prices.

At the time I pointed out that this demonstrates Kocieniewski’s appalling ignorance, as Trafigura is not a speculator, and is typically short futures (and other derivatives) to hedge its inventories of oil (and other commodities). Companies like Trafigura have no real interest in the direction of oil prices directly. They make money on margins and volumes. The relationship between these variables and the level of flat prices depends on what makes flat prices high or low.  I further said that if anything, commodity traders are likely to prefer a low price environment because (1) low prices reduce working capital needs, which can be punishing when prices are high, and (2) low price environments often create trading opportunities, in particular storage/contango plays that can be very profitable for those with access to storage assets.

Well, imagine my surprise (not!) when I saw this headline and article:

Crude slide bolsters Trafigura’s profits and trading margins

Trafigura has posted record half-year profits and a doubling of trading margins, illustrating how one of the world’s largest commodity trading houses has been a big beneficiary of the collapse in oil prices.

Profits at the group rose almost 40 per cent in the six months to 31 March, reaching $654m, while margins hit 3.1 per cent, as the Switzerland-based company used its global network of traders and storage facilities to buy cheap crude and take advantage of dislocations in the oil market.

. . . .
It was not the only company to benefit. Other trading groups including Vitol, the largest independent oil trader, and Gunvor have posted strong results for this period. Even ShellBP and Total managed better-than-expected first quarter results thanks to the performance of muscular trading operations.

Wow. In Kocieniewskiworld, “Crude slide bolsters Trafigura’s profits” would be a metaphysical impossibility. Here on earth, that’s an eminently predictable event. Which I predicted. Not that that makes me a genius, just more knowledgeable about commodity markets than David Kocieniewski (which is a very low bar).

Not that there was ever anything to it in the first place, but this pretty much blows to hell the entire premise of Dim Dave’s story. Proof yet again that if you read the NYT for economics stories, you’ll wind up dumber after reading than before.

* As well as an unethical slug who blatantly violated the NYT’s ethics guidelines. Not that his editor gave a damn, making him as much of an unethical slug as Kocieniewski.

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June 11, 2015

The Ethanol Mandate is Enough to Drive Me to Drink

Filed under: Climate Change,Commodities,Economics,Energy,Politics,Regulation — The Professor @ 6:13 pm

About 19 months ago I wrote about RINsanity, i.e., the United States’ nutty ethanol (and other biofuel) program. RINsanity has long outlived the phenomenon (Lin-sanity) that inspired the neologism. A couple of weeks ago, the EPA announced the ethanol and biodiesel quotas . . . for 2014. Who said time travel is impossible? That Einstein. What an idiot!  (The EPA also announced quotas for 2015 and 2016.)

In a nutshell, despite protestations to the contrary, the EPA largely conceded to the reality of the E10 “blend wall” (the fact that the vast bulk of auto engines are incapable of burning fuel with more than 10 percent ethanol), and announced quotas that were (a) smaller than the market expected, and (b) smaller than the statutory amounts that Congress specified in its farseeing omniscience 10 years ago. At the same time, the EPA decreed larger quotas for biodiesel.

As a result, the market did the splits. The price of ethanol RIN credits that count towards the ethanol quota plunged, while the price of biodiesel RIN credits that count towards the biodiesel quota rose. Scott Irwin and Darrell Good have all the gory details here. (Those are the guys to follow on this issue, folks. I’m just kibitzing.)

As a result, pretty much everyone is upset. The nauseating biofuel lobby is screaming bloody murder because the ethanol quota is too small, and is threatening to go to court. Those holding ethanol credits are fuming due to the forty plus percent price decline.

This all points out the dysfunctional nature of environmental markets in which the supply is set by some opaque politicized bureaucratic process unhinged from economic reality. (The European CO2 credit market is another classic example.) The Congressional mandate set quotas (supplies) years in advance based on forecasts of future fuel demand that turned out to be wildly incorrect. So the EPA played Mr. Fixit, and through some unknown process, divined what Congress meant to do-really!-and announced some surprising numbers that caused prices to plummet.

The EPA’s reaction? It is shocked! Shocked! to find gambling going on at Rick’s (ethanol served here!):

The EPA didn’t intend for the program to create a speculative market, and an agency spokesperson declined to comment on RIN price movement.

“RINs are used to demonstrate compliance under the Renewable Fuel Standard program,” the EPA said. The agency manages an electronic system that tracks the RINs, but not their prices on the open market.

Earth to EPA! Earth to EPA! (And hey-aren’t you supposed to be earth’s stewards? So what are you doing orbiting Pluto?): if you create a scarce resource (ethanol credits) a market-and yes, one with speculation!-will appear. This is inevitable as the sun rising in the east. Another unintended but metaphysically certain event.

Indeed, the kind of speculation that these markets foster is particularly bizarre, because of the necessity of speculating on the feedback between the market and the EPA’s decisions on the amount of the scarce resource it creates. A big part of the RIN prices is market participants’ expectations about what the EPA will decide. If the EPA’s decision takes the market price into account, in some unknown (and almost certainly unarticulated) way, the reasoning chain becomes mind-numbingly complex very quickly. Mr. Market guesses what the EPA will do. That affects prices. The EPA takes the price, and guesses what this says about what the market knows about fundamentals . . . and what the market thinks about what the EPA is going to do. It adjusts its decision accordingly. Market participants have to make judgments about the feedback between the price and the EPA’s decision, which can affect the EPA’s decision, and on and on, ad infinitum. (This is analogous to Keynes’s beauty contest metaphor, and Soros’s theory of market “reflexivity.” Sign of the apocalypse alert: I gave Keynes and Soros a favorable mention in a single blog post.)

That’s no way to run a market, but the alternatives are  likely worse. One alternative would be to set quotas for years far into the future, and then not adjust them based on the evolution of other fundamentals that cannot be foreseen when the quotas are set.

It’s pretty clear that events like have just rocked the biofuel world are an inherent part of the system. Somewhat arbitrary, inherently difficult to predict (in part because they are politicized), and “reflexive” decisions are a major determinant of supply. These decisions are made at discrete times. It is extremely likely that there will be disconnections between the quantity the market thinks the EPA will select and what the EPA actually chooses. Given the inelasticity of demand for energy products, these supply surprises lead to big price impacts.

All of which goes to show that a better use of ethanol is imbibing it to cope with the craziness of a faux market.

Of course it’s not just that the market is crazy: it’s crazy that there is a market. Ethanol is an economic and environmental and humanitarian monstrosity. Yes, ethanol would play a role without subsidies or mandates. But a much smaller role. Forcing and inducing its use is costly, not environmentally beneficial, and raises the price of food, which hits the poorest the hardest. So this crazy market shouldn’t exist in the first place. I think I need another drink.

 

 

 

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