Streetwise Professor

May 19, 2019

G’Day, Greenies: I Frolic In Your Salty Tears

Filed under: Climate Change,Commodities,Economics,Energy,Politics — cpirrong @ 2:18 pm

I promised I would write a post on the Australian power market when a suitable article came along, and that time has come.

Check out the logic. Australia closes its coal plants (highly efficient, reliable, and with a cheap source of fuel given Australia is a dominant coal producer), and replaces them with wind. Wind, being highly erratic, requires (given the closure of the coal plants) gas-fueled plants to offset the variability of wind output, and as a result gas is on the margin most hours in Australia. And Australian power prices are sky-high because . . . LNG exports reduce gas supplies in Australia, keeping the price of gas high.

Riiiggghhhttt.

You cannot make up this stuff.

No. It’s not the first two links in the process that are blamed–the ones that those who are whinging deliberately chose. Instead, it’s the last link, which was an inevitable result of the first two choices.

This is blame shifting on crack.

I should also note that those gas resources that supply exports would not have been developed absent the export market. They would not have been developed to supply the domestic market alone. So LNG exports are a scapegoat for a problem created by conscious decisions by the green left (i.e., the watermelons) to jam renewables down people’s throats.

It is particularly ironic that this article came out shortly before the Australian election, the results of which have caused a complete mental breakdown on the left. The Liberal Party (which is to the right, relatively speaking, Down Under) staged a surprising upset of the Labour Party, resulting in an unhinging comparable to that in the UK after Brexit or the US after Trump. I can’t tell you the number of tweets I read where people–adults, allegedly–confessed to crying uncontrollably.

I frolic in their salty tears.

The irony comes from the fact that the Labour Party is hard core in its support for yet more attempts to decarbonize Australia’s economy. Perhaps they should consider the possibility that a major reason for their rejection at the polls is the anger of many Australians at the consequences of previous climate-driven policies (including sky high electricity prices), and their wanting no more of such nonsense.

The shock on the left at the outcome shows that three years after Brexit and two-and-a-half years after Trump the leftist elites have learned nothing, and forgotten nothing. It is no doubt another example of their perpetual bullshit loop in action. Leftist-friendly views dominate the media. Anyone expressing contrary views is attacked, which leads to self-censorship and preference falsification. So leftist opinions and sentiment dominate public discourse, convincing leftists that everybody agrees with them, except for a lunatic fringe. But in the privacy of the polling booth, people can express their true views, and perhaps do so with a relish, as this is an opportunity to stick it to those who shout them down. The result is shock and dismay on the left.

But they are as ever incapable of learning, instead just writing off their conquerors as cranks and extremists. As annoying as they are, I hope they don’t change. Because as long as they don’t change, they will continue to lose.

Ironically, the left’s climate change obsession is one of the things that doomed them:

Australian conservative Prime Minister Scott Morrison’s surprise come-from-behind win in national elections was fueled by a campaign that focused on fears that economic and climate policies pledged by center-left opponents would end the world’s longest growth streak.

. . . .

Climate change re-emerged as an election issue following a summer of wildfires, drought, floods and extreme temperatures. Voter support for policies aimed at addressing climate change was at the highest level since 2007. But, as in the U.S., divisions grew more stark as the issue gathered steam.
Labor pledged to reduce emissions by 45% from 2005 levels by 2030, after Australia under the conservatives became the first developed nation to abolish a price on carbon in 2014. The party also promised a push on renewable energy and electric vehicles, offering detailed and transparent policies that opened its agenda to months of concerted attack from Mr. Morrison.

Given the track record (e.g., the high electricity prices that motivated this post), this was a target rich environment for Mr. Morrison and the Liberals. And it is evident that they put much steel on the target.

Also ironic is that the Labour Party was defeated in part by the impact of its climate policies on what was once upon a time the bedrock of labor movements and parties around the world: coal miners, and those dependent on coal production. This demonstrates yet again that left parties have basically abandoned their historical constituencies, and are now dominated by effete metropolitans who are not only completely unfamiliar with muscular labor, but actually despise the muscular laborer.

Excuse me while I engage in a little long distance schadenfreude, and scroll through Twitter to witness yet another meltdown by the Bourbon left.

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May 16, 2019

The Science Is Never Settled

Filed under: Uncategorized — cpirrong @ 6:21 pm

Anyone who says that “the science is settled” is a fool or a charlatan. Case in point: Darwinism and its more rigorous heir Neo-Darwinism. These have been “settled science” (in the case of the former) since no later than the Scopes Trial in 1925. But as this fascinating review article by the estimable David Gelertner demonstrates, these theories cannot do what they purport to do: explain “macro-evolution,” or to quote the title of Darwin’s famous work, explain the “origins of the species.”

The eminent statistician George Box once quipped, “all models are wrong, but some are useful.” Darwinism and Neo-Darwinism have proved incredibly useful. They have provided the models that have resulted in the incredible strides in understanding, and manipulating, genetics and the genome. That is, they have proved enormously useful at a micro level–that is, within a species

But that’s not what Darwin set out to do, nor what neo-Darwinists claim to be able to do–explain how life forms evolved from one celled organisms to incredibly complex ones like humans. And Gelertner (or more exactly the author of the book Gelertner reviews, Stephen Meyer) explains why. It’s a matter of probability. Ironically, the discoveries in genetics derived from working in the Darwinian model/paradigm undermine its macro claims.

Evolution in the Neo-Darwinian framework is driven by mutation: “pure chance and lots of time” as Gelertner phrases it. But the odds against a useful mutation are so immense, that there is never enough time. Genes make proteins, and proteins are chains of 150+ amino acids:

The total count of possible 150-link chains, where each link is chosen separately from 20 amino acids, is 20150. In other words, many. 20150 roughly equals 10195, and there are only 1080 atoms in the universe.


What proportion of these many polypeptides are useful proteins? Douglas Axe did a series of experiments to estimate how many 150-long chains are capable of stable folds—of reaching the final step in the protein-creation process (the folding) and of holding their shapes long enough to be useful. (Axe is a distinguished biologist with five-star breeding: he was a graduate student at Caltech, then joined the Centre for Protein Engineering at Cambridge. The biologists whose work Meyer discusses are mainly first-rate Establishment scientists.) He estimated that, of all 150-link amino acid sequences, 1 in 1074 will be capable of folding into a stable protein. To say that your chances are 1 in 1074 is no different, in practice, from saying that they are zero. It’s not surprising that your chances of hitting a stable protein that performs some useful function, and might therefore play a part in evolution, are even smaller. Axe puts them at 1 in 1077.


In other words: immense is so big, and tiny is so small, that neo-Darwinian evolution is—so far—a dead loss. Try to mutate your way from 150 links of gibberish to a working, useful protein and you are guaranteed to fail. Try it with ten mutations, a thousand, a million—you fail. The odds bury you. It can’t be done.

There is also the problem of creating whole new life forms:

To help create a brand new form of organism, a mutation must affect a gene that does its job early and controls the expression of other genes that come into play later on as the organism grows. But mutations to these early-acting “strategic” genes, which create the big body-plan changes required by macro-evolution, seem to be invariably fatal. They kill off the organism long before it can reproduce. This is common sense. Severely deformed creatures don’t ever seem fated to lead the way to glorious new forms of life. Instead, they die young.


Evidently there are a total of no examples in the literature of mutations that affect early development and the body plan as a whole and are not fatal. The German geneticists Christiane Nüsslein-Volhard and Eric Wieschaus won the Nobel Prize in 1995 for the “Heidelberg screen,” an exhaustive investigation of every observable or inducible mutation of Drosophila melanogaster (the same patient, long-suffering fruit fly I meddled with relentlessly in an undergraduate genetics lab in the 1970s). “[W]e think we’ve hit all the genes required to specify the body plan of Drosophila,” said Wieschaus in answering a question after a talk. Not one, he continued, is “promising as raw materials for macroevolution”—because mutations in them all killed off the fly long before it could mate. If an exhaustive search rules out every last plausible gene as a candidate for large-scale Drosophila evolution, where does that leave Darwin? Wieschaus continues: “What are—or what would be—the right mutations for major evolutionary change? And we don’t know the answer to that.”

. . . .

Darwin would easily have understood that minor mutations are common but can’t create significant evolutionary change; major mutations are rare and fatal.

So where does that leave us? With very unsettled science. And this in the area in which scientists are justly proud of the enormous progress they have made working within the established paradigm. Progress that has changed lives in almost unfathomably ways, and which will continue to do so for the foreseeable future.

But that is what Kuhn called “normal science”: incremental progress within an established paradigm. This is fertile ground for a Kuhnian paradigm shift. An accepted paradigm cannot explain vital facts–macroevolution, in this instance. Indeed, here it cannot explain the very phenomenon it purports to be able to explain and was in fact developed to explain. That failure will trigger the hunt for a new paradigm. And likely sometime someone will develop it.

Keep this in mind whenever you hear that the science is settled, especially in fields–like climate science–where the underlying problem (the behavior of a dynamic, non-linear system) is as complicated or perhaps more complicated than biological evolution, and where the normal science in the existing paradigm has been far less successful than Darwinism/Neo-Darwinism.

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May 15, 2019

Round Up the Usual Suspects, Druzhba Pipeline Contamination Edition

Filed under: Energy,Russia — cpirrong @ 1:36 pm

Russia roiled European oil markets by shipping millions of tons (perhaps upward of 5 million, or about 35 million barrels) of crude oil contaminated with organic chlorine over the Druzhba (“Friendship”) pipeline. The contaminants have the nasty habit of turning into hydrochloric acid in refineries–not good!

About 2 weeks after the first news of the contamination, the Russians claimed they had cracked the case. They arrested four executives of an obscure oil company in Samara, and sought two more, claiming that the company had pumped the oil to conceal a million ruble fraud. One million rubles, as in about $15 grand.

Now, I can see how some Fargo-esque Russian crooks could wreak such havoc to cover up a petty crime, but I’m also very skeptical of the official story.

To start with, amazing, ain’t it, that crack Russian investigators who let many major crimes go unsolved for, like forever can solve this one in mere days? The fact that some of the alleged perps have Chechen names also suggests that this was a “round up the usual suspects” bust that would make Claude Rains/Captain Renault proud.

Also, the quantities don’t make sense. The contamination is serious, and even 10 million rubles of oil would represent only a couple of thousand barrels: could that create the kind of contamination that has forced the shutdown of a pipeline that can carry 1.2-1.4 million barrels per day?

No, pinning this on some obscure suspects seems just too pat, and calculated to let major players (such as the pipeline monopoly Transneft, and major producers, such as Rosneft) off the hook.

Even if crooks in Samara succeeded in introducing into Druzhba contaminated oil in quantities sufficient to make millions of tons unusable, this just raises other questions. Like, who was monitoring what was going into the pipeline? How were the crooks able to get this much bad oil into Druzhba? How is Transneft’s failure to detect this not negligent–or perhaps itself criminal (e.g., involving bribing Transneft employees to overlook the introduction of the tainted oil into the pipeline).

However you look at it, this validates many stereotypes about Russia. Rife criminality, or corruption, or incompetence–or all of the above!

Update. Some back-of-the-envelope calculations. The contaminated oil had 150-330 ppm of the organic chlorides. The acceptable level is 10 ppm. Assume that prior to the contamination, the oil had the maximum allowable amount, 10 ppm. If the contaminated oil had 100 times the allowable amount (1000 ppm) over 14 percent of the oil in the pipe had to be contaminated to that level just to get it to 150 ppm. To get it to 330 ppm, almost a third would have to be contaminated. At 1mm bpd of throughput, that’s 140k-330k bpd. That’s a lot of oil, and certainly more than the piddly companies blamed for this contamination can produce. Even if you increase the contamination by an order of magnitude, you are still talking 1 to 3 percent of the oil in the pipeline.

But if you crank up the contamination rate to cut down the volumes, that just raises the question: WTF was Transneft doing to allow oil with 100 to 1000 times the allowable limit getting into the pipeline.

Pick your poison, Transneft.

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May 12, 2019

Forget the Project Winner: The Winners of Projection Are . . .

Filed under: Politics — cpirrong @ 9:08 pm

So every election night, all the broadcast and cable news networks project the winners. Most nights, it’s about a 50-50 split between Republicans and Democrats, give or take. But when it comes to the winners of projection, the Democrats have it in a landslide.

Here are examples, just from the last week.

Hillary Clinton said if it were anybody other than Trump, they would be in jail. This from the woman who if she was anybody other than Hillary Clinton would have been jailed in the 80s, the 90s, and the 10s. I guess she rested up in the noughties.

Next item: the latest ongoing freakout is about Giuliani talking about going to Kyiv to encourage the Ukrainians to investigate then-VP Joe Biden’s pressuring the government there to get rid of a prosecutor that was investigating, among other things, a business that his son Hunter was involved with. How dare he (and Trump) attempt to get a foreign government to dig dirt on a political opponent!

Er. . . the DNC/Clinton campaign actively worked with the Ukrainian government to dig dirt on Trump in 2016. Some woman whose name comes right off the Taco Bell menu–Andrea Chalupa–was the liaison between the DNC and the Ukrainians.

We are now learning that the enterprising Hunter profited from private equity deals in China (with no previous experience in either private equity or China, let alone in both) weeks after accompanying his father to the country aboard Air Force Two. I’m sure his success in markets as difficult for foreigners and as different as Ukraine and China are a testament to Hunter’s awesome business skillz, rather than any family connections, right?

Compare this with the hyperventilating over Trumps failed attempts to do business in Russia. Beyond putting on a Miss Universe pageant in Moscow, I mean. But those attempts supposed mean that Putin OWNS Trump. Owns him, I say! But there is no quid pro quo involved when Joe makes the rain for his boy, right?

The Mueller report has done little to stem the hysteria in the most feverish quarters of The Swamp about Trump’s alleged collusion with the Russians to, among other things, dig dirt on Hillary. For instance, the egregious James Comey (more about him a future post!), for example, said last week that he still believes that “it’s possible Russia has leverage over Trump.”

Er . . . WTF was the Steele dossier, but an American presidential campaign hiring a foreigner (through two cutouts, no less) who colluded with foreigners (Russians, no less) to spread dirt on Trump?

Then there’s this, from the appalling Susan Hennessey at Lawfare:

Does anyone really doubt that Trump would love to have the FBI investigating his opponent during the campaign? Does anyone doubt that he would abuse his office in attempting to initiate or direct such an investigation?

Uhm . . . this is EXACTLY what her heroes–she is basically a polyp in Comey’s colon–did in 2016.

I could go on. And on. And on. But the basic point is that I don’t have to project the winner of projection. The results are already in. You can pretty much bank on this: whatever the Democrats say about Trump is true about them. In spades.

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May 4, 2019

Germany and Sweden Want to Reduce CO2 Emissions in the Worst Way–and Are Succeeding!

Filed under: Climate Change,Economics,Energy,Politics,Regulation — cpirrong @ 5:46 pm

I’ve written often about the economic nightmare that are renewables, specifically wind and solar power. They are terribly inefficient because they are intermittent, and they are diffuse. The intermittency requires maintaining substantial backup capacity. Their diffuse nature means that they are incredibly land intensive. I should also add that renewable energy sources are not miraculously located where loads are. Indeed, they are often located far, far away from load, and therefore necessitate substantial investment in transmission.

How inefficient? This recent University of Chicago study documents that the difference in cost between renewable and conventional generation dwarfs any possible benefit from CO2 reduction. To reprise the old joke: governments that subsidize renewables want to reduce CO2 emissions in the worst way, and they have.

Heretofore the Germans have been the world’s leader in renewable idiocy, with their Energiewende debacle, which has raised power costs to among the world’s highest, and not led to decreases in CO2 emissions (due mainly to the intermittency problem mentioned above). Well played! So how are the Germans going to deal with this? Perhaps by making electricity MORE expensive, by adding a CO2 tax on top of the CO2 cap and trade scheme.

I would say that will be hard to top Germany’s leading position in the ranks of renewables retards, but the Swedes are giving it a gallant try. So get this. The Swedes are replacing cheap zero carbon power (from four nuclear plants) located near load centers like Stockholm with expensive zero carbon power produced my windmills in the frozen back of buggery in the far north of Sweden. One big problem, they are woefully short of transmission capacity from back of buggery to the places where Swedes actually live and work.

This will make power more expensive, and is already constraining economic activity in Sweden. Moreover, it is raising the risk of blackouts.

So the Swedes may be replacing reliable carbon free electricity with electricity free electricity. That will be fun in the winters, eh?

Realistic people who believe that it is necessary to reduce carbon emissions understand that nuclear power is the efficient way to do so, and will become even more efficient with the development of new reactor technologies. It would be far more economical to invest in improvements in nukes than vast wind and solar projects.

But the Swedes appear to still be in the thrall of post-Three Mile Island hysteria (note that the decision to close the plants was made in 1980, a year after TMI) just as the Germans responded to post-Fukushima hysteria by deciding to close all their nukes.

That is, the energy policies of supposedly sophisticated societies are being driven by bugbears and bogeymen–a morbid obsession with CO2, and a view of nuclear power shaped by a nearly 40 year old Jane Fonda movie. This is leading them to force people to rely energy sources that are monstrously inefficient, making said people poorer. (Not to mention that a monomaniacal focus on CO2 leads them to overlook the total environmental impact of wind and solar, which is not a pretty picture.)

The Swedes are also leaders in a modern-day Children’s Crusade (that worked out great the first time, right?) to impose their climate bogeymen on the rest of the world. A rather unfortunate Swedish teenager is going around lecturing the world on the need for drastic action on CO2 now. This is an emotionally manipulative use of children as a substitute for actual argument and analysis and facts. Cynically, it exploits the reluctance of people to criticize children (even though they know nothing, or next to it), especially ones (in the words of the immortal Hank Hill) that ain’t right.

And behold what policies the Swedes want to visit on the rest of us. What they do in Sweden is their business, but they should keep their noses out of everyone else’s.

Makes me more glad than ever that my ancestors bugged out for Minnesota 140 odd years ago. But recent research suggests that they are to blame for Sweden’s current idiocies! I’ve long hypothesized that more independent souls are far more likely to emigrate, leaving the conformists behind. And recent research focusing on Scandinavia provides support for this hypothesis:

The researchers suggest the migration flows, which were small relative to the native population of America but equivalent to about 25 per cent of the total population of Scandinavia, changed the character of Norwegian and Swedish society by removing the most ambitious and independently-minded people.

So Scandinavia’s loss was America’s gain. And if their energy policies are any indication, they are still paying the price today.

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April 28, 2019

Erdogan: Cruisin’ For a Bruisin’

Filed under: Economics,Politics,Turkey — cpirrong @ 7:18 pm

I don’t believe it is an exaggeration to say that Turkey is ruled by a lunatic–Recep Tayyip Erdogan. His increasingly autocratic rule is putting Turkey at serious risk of an economic and geopolitical crisis.

Erdogan dreams of Turkey becoming the dominant power in the Middle East, a modern day version of the Ottoman Empire, including an explicit Islamic orientation–a decisive break with the founder of the Turkish Republic, Mustafa Kemal Ataturk, who eschewed imperial ambitions, and who was avowedly secularist, and indeed, harshly anti-Islam. (Which is one reason Erdogan despises him.)

These ambitions have led Erdogan into some foreign policy disasters, most notably in Syria. At the outset of the Syrian civil war, Erdogan was supporting the rebels and foursquare behind attempts to overthrow Assad. In this he failed utterly. But in the attempt, he (through his intelligence services) provided support to the most radical Islamist elements in Syria–including ISIS.

The Syrian debacle contributed to a serious breach with Europe which has all but eliminated the prospects for Turkish accession to the EU. In particular, his cynical unleashing of waves of Syrian refugees into Europe, and his threats of sending even more, thereby blackmailing the EU into providing Turkey financial aid, have left Turkey friendless in Europe.

Even worse, from a geopolitical perspective, has been his picking fight after fight with the US. The list is long. The extended standoff over an American minister he had imprisoned. His rapprochement with Iran in Syria (which in effect was a concession of his failure to achieve his objectives there), and generally cooperative relationships with Iran, including most notably helping the Islamic Republic circumvent US sanctions by exchanging Turkish gold for Iranian gas. His strident opposition to Israel. His cooperation with another American pariah–Venezuela–which Turkey is helping evade sanctions by agreeing to refine Venezuelan gold. His burning desire to destroy America’s Kurdish allies who have been the only effective local force in the battles against ISIS, said desire driven by Erdogan’s burning hatred of the Kurds in Turkey. This desire to attack Kurds in Syria has led to standoffs (with the serious risk of escalation) with US troops working with them. And last, but by no means least, an agreement to purchase S-400 surface-to-air missile systems from Russia despite the information this could provide the Russians about US F-35 aircraft–which Turkey wants to purchase.

Some of these things–canoodling with Iran, opposing Israel–were not a problem with the Obama administration. They are a big deal with Trump.

The real lunacy is that Erdogan is risking a confrontation with the US at a time when his economy is teetering–in large part due to his mismanagement. The lira dropped significantly last summer, and although it has recovered (a) it is still substantially below the level of 2017, (b) has been dropping steadily since topping out in December, and (c) is poised for another drop due to Erdogan’s inveterate hostility to higher interest rates–well, to interest rates period, which he calls “the mother and father of all evil.” The Turkish Central Bank has been playing games to conceal how weak its reserve position is. These include borrowing dollars from Turkish banks via swaps, putting the dollars as on-balance sheet assets, but treating the swaps as off-balance sheet.

The Turkish economy is in recession, has heavy external indebtedness (which makes its low reserve position all the more dangerous), and has an economic management team that is universally considered to be greatly out of its depth. Erdogan did not help matters when he declared:

The main issue is interest rates. As interest rates are brought down, inflation will fall. The real problem is interest rates. I’m also an economist.

Not only is he not an economist (as his getting the Fisher effect exactly backwards shows), I don’t even think he’s ever even stayed at a Holiday Inn Express. Combining his economic stupidity with his autocratic behavior is a recipe for disaster.

Given this fraught economic situation, Erdogan courts disaster by continuing to pull Uncle Sam’s beard. He is very likely to need the US’s help to stave off economic crisis, and on the flip side, if sufficiently provoked the US could smash the Turkish economy with a mere flick of its fingers.

Erdogan also has domestic political problems. After prevailing in a surprise national election last summer that cemented his changes to the constitution creating a presidential system, his AKP party suffered some stunning losses in local elections last month, most notably a (narrow) loss in Istanbul. Erdogan is attempting to get a do over in the Istanbul election, claiming systemic voting abuses–in a city his party controlled at the time of the election. It is something akin to the Chicago Democratic machine blaming a loss on nefarious Republican voter fraud.

There are many reasons for Erdogan’s near panic over Istanbul. It will give his CHP opponents a highly visible platform and power base, in a city that is widely viewed as the launching pad for Turkish national leaders. (Erdogan was mayor there before becoming prime minister, then president.) Perhaps even more importantly to Erdogan, CHP control of Istanbul threatens to undermine his vast patronage system there (which will undercut his power), and also threatens to expose equally vast corruption (of which Erdogan has already been very credibly accused in the past).

Erdogan is not the type of man who will trim his sails in the face of such fierce headwinds. He will more likely redouble his confrontational efforts, both internationally and domestically, despite his extremely weak economic situation. This is not wise, and will not end well. A bad end to Erdogan is hardly something that should be rued, but his bad end will also mean serious and extended misery for the Turkish people, and a serious potential for even more instability in the Middle East.

This last prospect may be the only thing that saves Erdogan. The potential for turmoil may be the only reason why the Trump administration does not give Erdogan the brusin’ he has been cruisin’ for, not just recently, but since 2003.

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April 25, 2019

A Barbarous Relic, Indeed

Filed under: Commodities,Derivatives,Economics,Energy — cpirrong @ 3:37 pm

In my 2014 whitepaper, I called oil-indexing of LNG contracts a “barbarous relic.” The basic idea is that since oil prices and gas prices are driven by very different supply and demand fundamentals (and increasingly so), oil values and gas values diverge systematically, by large and varying amounts. This means that oil-indexed contracts sent misleading signals that lead to misallocations of consumption and production. These divergences also lead to disputes between the contracting parties, resulting in transactions and renegotiation costs.

A Reuters article from today illustrates that the distorting effects of oil indexation are real, and causing the kinds of dislocations I wrote about 5 years ago:


Asia’s liquefied natural gas market is being distorted as the cost of LNG bought under long-term contracts linked to oil prices jumps to double spot gas cargoes amid tighter U.S. sanctions on Iran’s crude exports and cuts in OPEC oil supply.


The price gap between LNG traded in the spot market and term cargoes linked to benchmark Brent crude oil has stretched to its widest in about 8 years, driving some buyers locked in to term deals to try to delay shipments or look to adjust contracts.

That is, oil-specific fundamentals (OPEC, Iran sanctions waivers) push oil up at the same time that abundant supplies and seasonal factors push LNG prices down.

This is leading to changes in consumption that are almost certainly inefficient because they are a response to crazy price signals:


The price distortion is driving some buyers in China and Japan to request delays in term cargoes, several industry sources told Reuters, although they added that producers had so far resisted making large concessions.
Others are looking to utilize so-called downward quantity tolerances (DQT) in their term contracts from LNG sellers, three of the sources said, requesting anonymity as they were not allowed to talk about the specifics of contracts in public.

Note too the negotiations, and the related transactions costs.

With the growing liquidity in various gas benchmarks (JKM, TTF) and the integration of the world LNG with an existing highly liquid benchmark in the US (Henry Hub), oil indexing is getting to be more of a relic, and more barbarous by the day.

Reuters recently ran another article that identifies a factor that will further encourage the development of LNG spot trade, and gas-on-gas pricing:


The world’s biggest liquefied natural gas (LNG) producers including Shell, Total and Petronas are increasingly selling from global supply pools instead of dedicated projects as buyers leverage a fuel surplus to force ever more flexible deals.


This marks an accelerated turning from traditional long-term contracts that lock customers into taking regular volumes from specific projects under oil-linked pricing formulas.


Global oversupply that has pulled spot LNG prices LNG-AS down by more than 50 percent over the past half-year has producers succumbing to consumer demands for fuel on shorter notice and without sourcing or destination restrictions.


“A more dynamic and liquid LNG market, and the need for greater flexibility by traditional LNG buyers, is providing opportunities for shipping optimisation and trading, and enabling new entrants such as LNG traders,” said Saul Kavonic, head of energy research for Australia at Credit Suisse.

Majors like Shell, Total, Exxon and Chevron are moving aggressively into LNG. (One motive for the Chevron bid for Anadarko was the latter’s Mozambique LNG project.) Aramco is also moving into the market. Large players like this do not need to rely on project finance that banks and the capital markets are willing to supply only if the price risk can be managed via long term contracts with prices that can be hedged on the oil market. It is feasible for them to sell out of a portfolio of projects on a shorter-term or gas indexed basis.

This will make the LNG look even more like the oil market, in which the majors (and national oil companies) supply the market out of a portfolio of production sources. Indeed, in some respects LNG is even more amenable to a portfolio-based strategy. LNG is far more physically homogeneous than oil, allowing a given project to serve a larger fraction of demanders. Moreover, the seasonality of gas demand, and the susceptibility of gas demand to big but rather localized shocks (e.g., the effects of Fukushima, a drought in the Amazon that reduces hydroelectric supply) creates a need for flexibility that is best met through gas portfolios that provide locational and timing optionality.

Such developments will make oil-linking even more of a barbarous relic than it already is–which is saying something.

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April 24, 2019

Elon the Stakhanovite

Filed under: Economics,Energy,Tesla — cpirrong @ 7:02 pm

Our Elon is all about exceeding expectations. Analysts predicted a $1.30/share loss in Q1. Elon scoffed. Piddling! He showed ’em–the actual loss was $2.90.

Overexceeding norms by 123 percent! Stakhanov would be proud.

Joking aside, the Q1 numbers were a bloodbath. A loss of over $700 million. In a quarter, mind. Cash flow was negative $920 million. The company said this is an improvement! A year ago it was -$1.05 billion!

Well, the cash flow numbers would have been worse–and worse than last year–had Tesla spent the anticipated $509 million in capex, instead of the actual $279 million.

Remember what I said about Tesla bleeds cash like a Game of Thrones battle scene hemorrhages blood? That hasn’t changed.

Tell me again why Tesla is a growth company. What other growth company is, or has ever been, on a capex starvation diet? Especially one that claims to have all sorts of new products just on the verge of production.

Revenues also cratered–$4.5 billion v. estimated $5.2 billion, and down from $7.2 billion a mere quarter ago.

A few days before the Q1 earnings release, Tesla held “Autonomy Investors Day” in which attempted to distract attention from its dismal present with Futurama visions of a magical future, with zillions of autonomous robotaxis prowling the world’s thoroughfares. Yeah. Robotaxis. That’s the ticket!

This is just the Musk MO–always try to keep the suckers focused on a brilliant future. The next big thing is around the corner. The problem is, it is always around the corner, and the autonomous vehicles–and Tesla the company–haven’t learned how to turn the corner.

Elon also claimed (based on highly dubious assertions that NVIDIA hotly disputes) that Tesla would create a better chip than one of the world’s leading, and most innovative, chipmakers. Sure! And the problem with production is with the world’s leading battery manufacturer, not the car manufacturing tyro. Sure!

It appears, however, that Elon’s con is less convincing than it used to be. People are figuring it out. Finally. The Autonomy Day was widely panned, and his claims regarding chips widely mocked.

Elon also said “The only criticism and it’s a fair one, sometimes I’m not on time. But I get it done and the Tesla team gets it done.” Sometimes? Try always. And gets it done? Like the rooftop panels? The factory in Buffalo? The $35K Model 3 that is virtually impossible to actually, you know, buy? The innovative vertically integrated clean energy company that would result from the merger of SolarCity and Tesla? (Tesla is basically winding up SolarCity. It is disappearing like the Cheshire Cat. Except there won’t be a smile left when it’s done.)

I will just note in passing that a SpaceX test capsule had an “anomaly” on testing. Pictures show smoke billowing from the test area. I guess “anomaly” is how you spell “fire” now.

Remember that Elon promised no new capital raises. Given that losses are anticipated again in Q2, and that promises of profit in Q3 are dubious given Elon’s track record, how this is possible is beyond me. And again, how that promise can be squared with his promises regarding autonomous vehicles and the Model Y and the semi etc., etc., etc. is even more fantastical.

As I have been saying for a while, this will not end well. And it is looking like that bad end is nigh.

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April 20, 2019

Evidence of Absence Is Incompatible With Obstruction

Filed under: Politics,Russia — cpirrong @ 10:56 pm

The Mueller Report was released (with redactions) on Thursday. Although the “collusion” portion of the report is framed, as is the case with most decisions not to prosecute, in terms of absence of evidence to meet a burden of proof, the thoroughness of the investigation and the findings come as close to providing evidence of absence as one is ever likely to find. Most telling was the conclusion that although the Russians made numerous attempts at gaining access to Trump and Trump personnel, these attempts were uniformly rebuffed.

Yet like the dog returning to its vomit–again and again and again–the media cannot resist parts of the Mueller report that keep the collusion dream alive. Like this piece in Bloomberg (which has been particularly insane in its post-Mueller coverage). They fail to realize that this story (and others like it) completely demolishes the entire idea of pre-election collusion. If Putin was in cahoots with Trump or his minions before 8 November, he would have had no need to use oligarchs–or anybody else–to try to establish connections with Trump’s people after 8 November. Yet people who were (are!) willing to believe baroque and convoluted theories like the one in which Trump was communicating with the Russians via an Alfa Bank server (to name just one) don’t see how ludicrous these theories are in light of Putin’s obviously desperate attempts to make contact after Trump’s surprising election. So surprising that Putin was clearly caught off-guard and unprepared and completely without connections with the incoming administration.

It is particularly delicious that the Russian billionaire featured prominently in the report (and the Bloomberg article)–Petr Aven–controlled Alfa Bank. So Alfa Bank was supposedly the portal between Putin and Trump which they used to coordinate their dastardly deeds but months later Putin sent the man in charge of Alfa Bank to open communications with Trump–and he fails!

Yeah. Makes total sense!

One wonders when Mueller realized that there was no there there. None whatsoever. I suspect he realized it very early on, but was loath to admit it. If this is so, his extension of the investigation to this late date–and well past the midterm elections–inflicted grave injury on the country, and makes Mueller a figure of infamy deserving severe obloquy.

It is against background that one must evaluate the second portion of Mueller’s report, relating to obstruction. Put aside the Constitutional issues raised by the fact that several of the theories of obstruction involve Trump’s exercise of his presidential powers (firing Comey, requesting that Sessions unrecuse himself, discussing using the pardon power), and others involve the ability of the president to fire an inferior official (which just points out the Constitutional anomalies of special counsels): firing Mueller would have been a blunder, rather than a crime, and Trump was indeed fortunate that he was talked out of it.

No, think of how you would have reacted if you had been subjected to a Kafkaesque investigation into something that you knew was complete and utter bullshit–and bullshit that had been concocted by your political enemies who were dead set on rationalizing–and avenging–their loss to you. I think you would be outraged, and feel completely justified in fighting back by whatever means necessary. I think any normal person would be. And heaven knows, Donald Trump is not normal. If he were, he wouldn’t be president. So of course he said intemperate things and contemplated intemperate actions and no doubt felt perfectly justified in his intemperateness–yet in the end did not take these actions.

Anybody who harrumphs at this–and yeah, I’m looking at you, Mitt–is irredeemably partisan, or not a serious person, or is completely incapable of realistically appraising how he or she would react if in another’s shoes. There are those who attempt to obstruct investigations because they know they are guilty, and there are those who fight investigations that they believe to be unjust. Mueller strained every nerve, tried out every possible legal theory, and left no stone unturned in his attempt to demonstrate illicit dealings, and admitted abject failure. This failure validates Trumps belief that the investigation was a travesty that never should have taken place, and puts his reaction in the second category rather than the first. The excesses are typically Trumpian ones.

That is, the evidence of absence of collusion completely undermines assertions of obstruction, given that obstruction requires mens rea. F. Scott Fitzgerald wrote “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” Finding Trump innocent (not just not guilty, but innocent) of collusion or conspiracy yet believing that he might have obstructed justice makes Mueller a genius, by the Fitzgerald standard. These are utterly opposed ideas.

Such geniuses the Republic can live without.

I would like to say that Mueller did Trump–and the country–a favor by proving him innocent of illicit dealings with Russia far more convincingly than Trump ever could have himself. To be found not culpable by people who are almost certainly your enemies and who desperately want to hang something on you is as close to vindication as you can get.

But facts don’t matter. Russia was just a pretext, a dog to tree Trump with. If that dog won’t hunt, his enemies will find another. And another. And another.

This is a power struggle, pure and simple. Meaning that Trump has to take that fight to his enemies. And the best way to do that is to attack legally the apparatchiks–the Brennans and Comeys and Clappers and those still in the bureaucracy–who unleashed the Russia collusion hound. And after that, to go after their political masters.

This is war to the knife. Trump has warded off the attacks so far, and almost miraculously survived. He can’t count on such luck continuing, especially since defeat will only spur his enemies to greater efforts. He has to be the attacker now.

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April 15, 2019

Chartering Practices in LNG Shipping: Deja Vu All Over Again

Filed under: Commodities,Derivatives,Economics,Energy — cpirrong @ 7:28 pm

One of the strands of thought that combined in my analysis of the evolution of LNG market structure is the idea of temporal and contractual specificities. This traces back to my dissertation, in what was published in a JLE article titled “Contracting Practices in Bulk Shipping Markets.” In that article, I addressed something that is a puzzle from the context of transactions costs economics: since the most common forms of asset specificity (especially site specificity) are not present for ships, why are many bulk carriers subject to arrangements that TCE posits address specificity problems, specifically long term contracts or vertical integration?

My answer was that even with mobile assets the parties could find themselves in small numbers bargaining situations and vulnerable to holdup due to temporal specificities: I need a ship at place X NOW, and maybe there is only 1 ship nearby. Or, I have a ship at place Y, but maybe there is only one viable cargo there. Long term contracts can mitigate this problem, but they create a form of externality. If most ships suitable for a given cargo are tied up under long term contracts, and most shippers have contracted for vessels for an extended period, the number of free ships and cargoes at any time will be small, thereby creating opportunism problems in spot contracting, which leads to more long term contracting. In essence, there is a spot (“voyage chartering”) equilibrium where most ships are traded on a spot basis, or a long term contracting equilibrium where they are not.

The article posits that these problems depend primarily on the specificity of the ship to particular cargoes and the “thickness” of trade routes. Cargoes suitable for standard bulk carriers on heavily-transited routes should sail on a spot charter basis: cargoes requiring specialized ships, and/or those on relatively isolated routes, are likely to require longer term ship chartering arrangements, or vertical integration.

By and large, the cross-sectional and time series variations in contracting practices line up with these predictions. One interesting case study that in the time series is crude oil. Prior to the development of spot markets in crude, most of it was shipped on oil company owned ships, or tankers obtained under long term charters. The development of spot markets for crude reduced the potential for holdup by freeing up cargoes. The ability to buy oil spot to replace a shipment that a specific carrier might have a time-space advantage in lifting reduced the ability of that carrier to extract rents. This flexibility also reduced the ability of shippers to extract rents from carriers. This reduced scope for rent extraction and opportunism in turn reduced the need for contractual protections, and soon after the spot crude market developed, the crude shipping market rapidly transitioned towards short-term chartering arrangements and vertical integration virtually disappeared.

One of the examples of long term contracting in my article was LNG shipping. LNG ships have always been very specialized due to the nature of the cargo: the only thing you can carry on an LNG carrier is LNG, and you can’t use any other kind of ship to carry it. At the time (late-80s/early-90s), most LNG was shipped between a limited set of sources (mainly Algeria) and sinks (mainly in Europe), and sold under long term contracts (20 years or more, for the most part). Consistent with the theory, LNG ships were also under long term contracts or owned by either the seller or buyer of LNG.

An implication of the analysis is that as in the crude market, the development of an LNG spot market should lead to more short term charters for LNG shipping. And lo and behold, this is occurring:

The market for LNG freight trade is relatively new and many companies are reluctant to talk about trading strategies, which are still being developed.


“We see LNG shipping as a commodity on its own,” said Niels Fenzl, Vice President Transportation and Terminals at Uniper, an energy firm which along with Shell, pioneered freight trade within the LNG market.


“We were one of the first companies who started to trade LNG vessels around two or three years ago and we see more companies are considering trading LNG freight now.”
. . . .

In general, traditional shipowners prefer to stick with long-term charters, which help them finance building new vessels, and let the energy firms and trading houses deal in the riskier short-term sublets.
But, given the potential money to be made, there are shipping companies focused almost entirely on servicing the LNG industry’s immediate or near-term requirements.

“The spot market is our priority now given the current rate environment as we don’t want to lock our ships in long-term charters prematurely in the recovery cycle,” said Oystein M. Kalleklev, CEO of Flex LNG, a shipping firm founded in 2006.


“We also do believe spot is becoming a much bigger part of the LNG shipping market as well as the overall LNG trade.”

Theory in action, yet again. The parallels to the experience in crude 40 years ago are striking.

And again as theory (although a different theory than TCE) would predict, the development of a liquid spot market is catalyzing the development of paper derivatives markets for hedging purposes. As one would expect, and has happened historically, this new market is primarily bilateral, opaque, and illiquid. But the potential for a virtuous liquidity cycle is there.

One problem at present is that the liquidity in the spot charter market is insufficient to provide the basis for an index that can be used to settle derivatives:

The difficulty for the index is having enough deals to base a price on, according to Gibson.


Also, many transactions are discussed privately, making it difficult to find out what price was agreed.

“In order for Uniper to consider trading on LNG freight indices we would need to see what mechanisms are offered to make the trade possible. If they could work in principle, we would look into using those,” Fenzl said.

But as the spot LNG market grows, and this leads to more spot ship chartering, indices will become feasible and better, which will spur growth in the derivatives market. And there will be a further positive feedback loop. The ability to manage freight rate risk through derivatives reduces the need to manage them through bilateral term contracts, which will further boost the spot chartering market.

One of the lessons of my old work (done when I was a small child! I swear!) is that there is a substantial coordination game aspect to contracting. If everyone contracts long term, that is self-sustaining: to go against that and try to buy/sell spot makes one vulnerable to opportunism and bargaining problems. Shocks (like the 1970s oil shock that transformed that market, or the variety of developments that led to more spot LNG trading in recent years) that lead to increased spot volumes can undermine that long term contracting equilibrium, especially if those volumes are sufficient to activate the positive feedback loop.

We are seeing that dynamic in LNG, and that dynamic in LNG is creating a similar dynamic in LNG shipping, a la oil in the 1970s. It’s deja vu, all over again.

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