Streetwise Professor

September 15, 2011

The Road to SEFdom

This week marks the beginning of a whirlwind couple of months in which I give talks or participate in conferences on either clearing or Frank-n-Dodd (there of course being a big overlap there).  Tuesday I moderated a panel at the ISDA Annual New York Conference, and yesterday I participated in a panel on Frank-n-Dodd at a Futures Industry Association event in New York.

First, the FIA event.  What came through loud and clear was the widespread belief that the SEF mandate in Frank-n-Dodd is wholly wrongheaded.  The consensus is that it is an attempt to jam a one-size-fits-all model on an inherently heterogeneous and non-standardized business–the business of executing OTC derivatives transactions.  That heterogeneity reflects the inherent heterogeneity of particular transactions, and the firms that want to execute them.  The market has evolved to accommodate heterogeneity, and the SEF mandate will impose uniformity.  Everybody better fit a 42-regular sportcoat, because that is what Frank-n-Dodd is going to force everybody to wear.

Of course there are dissidents from the consensus: most prominently those who do, or want to, operate SEFs.  Big surprise.  The NYT recently ran an article describing the efforts of these firms to influence policy.  The point you should take away from that article is that the idea of SEFS is not new, that SEFs have tried to gain traction in the market for some time (they are not “Johnny-come-latelys” in the words of one exec quoted in the article), but they have not made a big dent in the marketplace.

The failure to this point of SEFs to transform execution in the swap market, the way electronic trading did for listed derivatives, is a crucial fact.  It is not dispositive proof that the SEF mandate is misguided, but it does raise serious questions about it.  Before remaking the world, it is a pretty good idea to understand why the world is the way it is and why it isn’t the way you want to remake it.  Competition is never perfect, but competitive forces usually work inexorably towards the adoption of more efficient practices.  The rebuttable presumption should be that competition has pretty much gotten it right, and that policy prescriptions that are wildly at odds with existing practice are likely based on ignorance.  Those advocating a wholesale re-engineering of the results of market processes should be required to advance a coherent justification, based on rigorous logic and empirical evidence.

This the SEFocrats have not done.  Not even close.  And no, invoking the magic word “transparency” or advancing theories that presume that half the market is suffering from something akin to battered spouse syndrome don’t cut it.

The SEF rules are a particularly prominent example of the deficiency in cost-benefit analysis in CFTC rulemaking.  I have it on good authority that some analysis will soon be forthcoming that demonstrates that the cost of these rules will be immense.  As for benefits, the six members of the FIA panel couldn’t name one–even when pressed to do so.  We, collectively, couldn’t even come up with a “well you don’t sweat too much for a fat girl” compliment.  (If you don’t like that remark, direct your complaints to Ty Cobb:  I stole it from him.)  So, insofar as cost-benefit analysis is concerned–you should be able to do the math pretty easily.

The title for the post, by the way, is a joint product.  Tom LaSalla of CME Group coined “SEFdom” to describe what Frank-n-Dodd will soon bring on us.  I added the Hayekian allusion.  (Go figure.) I think the comparison is apt.

Insofar as the ISDA panel on clearing is concerned, I walked away from it thinking what I do after hearing any informed discussions of this subject: that it is the most devilishly complex issue you can possibly imagine.  It is one of the world’s biggest onions, and neither I nor anyone who has spent considerable time and effort thinking about it or actually doing it has gotten through even a small fraction of its layers.  The number of serious issues, their complexity, and their interconnectedness, is hard to exaggerate.

Which further demonstrates the frivolity of legislators and regulators around the world,who seized upon it as a panacea and imposed it without due consideration of these complexities.  The idea was hatched out of superficial understanding by panicked people who then proceeded to let others deal with the brain-twisting realities.

One hopes (though I do not expect) that regulators will be sufficiently patient and flexible to permit people who actually know something accommodate these complexities, and make the hard trade-offs that are necessarily involved.  New ideas on ways to perform the same functions as CCPs are still being developed: ISDA chief Conrad Volstad mooted a promising approach that would achieve the purposes of the clearing mandate, but at far lower cost.  These approaches deserve analysis and development before another one-size-fits-all approach is locked in.

I don’t like clearing mandates, but think that clearing has its virtues if it is done right, and in a way that reflects its comparative benefits and costs.  In this way it differs from the SEF mandate, which is why I gave the latter my Worst of Frank-n-Dodd Anniversary Award.  But rigid and superficial conceptions about how the mandate should work (and you know whom I am talking about) raise the very serious possibility that the potential benefits of clearing will be swamped by the unintended costs of imposing it where it is inappropriate, or in a way that is not adapted to its strengths and weaknesses.

September 14, 2011

I Don’t Think He’s Worth That Much

Filed under: Economics,Politics,Russia — The Professor @ 6:32 pm

A couple of day’s ago the WSJ’s Emerging Europe blog ran a story with a headline “Putin: Russia’s Trillion-dollar Man.”   My initial thought on reading the headline was that yeah I know he’s probably really enriched himself in his decade plus in power (and in St. Petersburg before that), but not quite that much.  But upon reading it, I found that the article was about Putin playing Ded Moroz (Grandfather Frost–the Russian Santa Claus):

As it comes closer to Russian parliamentary elections this year and the presidential election next year, Prime Minister Vladimir Putin has stopped promising billions and is now trumpeting more than a trillion dollars in spending to improve the lives of Russians.

According to Kommersant Vlast magazine, Mr. Putin spoke to his United Russia party leaders last week for just over an hour and a half, promising 33 trillion rubles ($1.09 trillion), or 9.6% more than in an April speech to parliament. If this rate of rhetorical spending increases continues, Mr. Putin will soon be spending far more than Russia’s gross domestic product, the magazine suggests.

But outright spending is only the first of Putin’s goodies.  He’s also putting off planned increases in electricity and rail tariffs

Russians, for example, had been braced for a sharp rise in government-regulated domestic energy tariffs that usually go up on January 1 each year. However, Vladimir Putin, the prime minister, announced a reprieve this week, saying the price hikes would be delayed by six months until July 2012.

The tariffs are often well below what costs would dictate, and the scheduled increases were in part an element of a plan to induce badly needed investment in new generation.  The politicization of utility pricing will make it all the more difficult to achieve the necessary improvement in the Russian electricity system.  But Putin evidently has very short term political goals in mind, so the long-term consequences be damned.

Ded Putin’s efforts will put all the more pressure on Kudrin to find the money to pay for the goodies Ded is doling out.  The profligacy also makes government finances more vulnerable to anything that stresses revenues–such as a decline in oil prices resulting from world economic weakness, which of course cannot be ruled out.  Kudrin is raising the alarms about this problem.

But again, that’s a problem for завтра.  But it does raise the question about what Putin is trying to buy today at tomorrow’s expense.  It’s patently political, and his very personal involvement in handing out the gifts strongly suggests that he is laying the groundwork for his presidential candidacy.  Not guaranteed of course, but this clearly steals attention from Medvedev.  So another indicator of his return to the presidency.

September 13, 2011


In this week’s edition of Energy Metro Desk, John Sodergreen wrote: “Normally, Pirrong is a ‘take no prisoners’
sort of economist.”  He was referring to my apparently serene response to the Singleton paper on energy speculation.

Rest assured, all, that I am not mellowing in my old age.  My response to Singleton qua Singleton was serene primarily because the results are capable of many interpretations, many of which are quite compatible to my views.  Further rest assured that I am my scathing self when it comes to the efforts to misinterpret and overinterpret Singleton’s results.  It is being waved about as the smoking gun proving that speculation distorts prices.  This is completely wrong, and reflects either the ignorance or agenda–or more likely, both–of anyone making the claim.

Remember what Puddin’ Head Wilson said: “We should be careful to get out of an experience only the wisdom that is in it — and stop there.”  People are getting far too much “wisdom” out of Singleton than there is in it. Singleton’s results are perfectly consistent with a favorable or benign effect of speculation.

But there is nothing more likely to get me to break out the black flag than an epistle from Bart Chilton, and yesterday he did not disappoint.  The NY Times’ Dealbook had this gem from our ol’ buddy Bart:

It’s a familiar cry from Wall Street executives and Congressional Republicans: New regulations will dampen profits and crimp an already-feeble job market.

But some federal regulators, now charged with writing dozens of new rules for Wall Street, beg to differ. Bart Chilton, a Democratic member of the Commodity Futures Trading Commission, argues that a regulatory shake-up would actually spawn a wave of hiring on Wall Street and in Washington.

“The possibilities for economic growth and competition here are mind-boggling,” Mr. Chilton said on Friday during a speech at the University of Maryland.

The debate centers on the controversial Dodd-Frank Act, which overhauled financial regulations after Wall Street nearly collapsed during the financial crisis. The law, among other things, transformed the $600 trillion derivatives markets, a lightly regulated industry at the center of the mess.

. . . .

“I have no doubt that these new regulations, instituting new types of clearing, trading and reporting platforms, will foster a landslide of hiring in the financial sector,” Mr. Chilton said.

In particular, Mr. Chilton forecast growing demand for technology experts. “All of this new trading activity, with new regulatory oversight requirements, will mean the development of new technologies, both in the private and public sectors,” he said.

The mind boggles.  Chilton, like all too many regulators and legislators, confuses costs and benefits.  This is the broken window fallacy on crack.  Said regulators and legislators should be required to have Bastiat’s discussion of the seen and the unseen flashed before their eyes repeatedly, Clockwork Orange-like, until the idea sinks in.  Short of that, I am at a loss at how to educate them on this profound–yet simple–concept.

Yes, we can see all the accountants and lawyers beavering away on Sarbanes-Oxley-related work.  But what about all the other–and actually productive–things those people could be doing if Congress in its infinite wisdom and overweening arrogance hadn’t seen fit to create an artificial demand for their services, that distracted them from doing something that is actually socially productive?  What about the companies that are smaller, and the companies that don’t exist, because of the burdens of this and other counterproductive regulation?

Frank-n-Dodd is Sarbanes-Oxley raised to a power far greater than one.  Yes, there will be lawyers and compliance people working in their tens of thousands to ensure adherence to its mind-numbing dictates.  Yes, the idiotic SEF requirement will result in a splurge in spending on technology, and there will be much rejoicing among programmers and IT people.  To the bean counting regulator or legislator this is good.  To the more perceptive, it is a crime.

Riddle me this, Bart: If this technology were actually valuable, why do you and your ilk have to force its creation?  You, in particular have been critical of the dizzying pace of technological development in the trading space.  So you know this is obviously a technologically dynamic industry where there is intense competition to create new products and services and methods of delivering them, not some tradition-bound backwater.  If the kind of technology Frank-n-Dodd is going to bring into existence were actually delivering value to market participants, you can be damned sure that somebody would have figured that out.  Many somebodies, in fact, who would be competing like hell to bring it to market faster and better than anyone else.

And further: please tell me what actually beneficial inventions will not be created, or will be delayed, because their would-be inventors are instead (rationally) responding to some inane government mandate?  You can’t, and I can’t.  But they exist.  Just because you can’t see them, doesn’t mean they aren’t there

And please: tell me how you distinguish a cost from a benefit.

Sadly, the inability to tell cost from benefit is rife in the 202 area code.  The disease is probably most acute at EPA, which blessed us with this gem of economic analysis:

In fact, the EPA has even suggested that new regulations can have a positive impact on job growth. “In periods of high unemployment, an increase in labor demand due to regulation may have a stimulative effect that results in a net increase in overall employment,” the agency wrote in February.

This is the kind of moronism we are dealing with, people.  And the rot is spreading.  Including to the CFTC, apparently.

When you read or hear this or that macroeconomic theory about why the recovery–such as it is–has been so weak, and why the economy totters on the brink of another recession, put it in its proper perspective.  Yes, macro factors are important.  But so too is the massive regulatory millstone hanging around our collective necks.  People who think costs are benefits are running amok.  And sad to say, they are just getting warmed up.

We need to fight these people.

* The Degüello was a bugle call dating from the Moorish Wars of the Reconquista in Spain. Literally, it means “throat slashing” and was played to signal “no quarter–take no prisoners.” Santa Ana’s army played it before the final charge at the Alamo.

September 11, 2011

Sunshine is the Best Disinfectant

Filed under: Climate Change,Politics — The Professor @ 7:21 pm

I haven’t written about climate controversies in quite a while.  Between Climategate, which discredited many prominent climate scientists, and impending economic catastrophe, which has made speculations about potential future catastrophes seem indulgent, concerns about global warming have been relegated to the back burner (no pun intended).  But the recent news about the CERN experiment testing the Svensmark hypothesis is worth comment.

Svensmark’s work is an attempt to explain the most inconvenient truth for AGM advocates: the strong correlation at all time scales between measures of solar activity and temperature.  Of course, correlation does not imply causation, but it is implausible that terrestrial conditions–including CO2–affect the sun.  It may be the case (though highly unlikely) that some other factor affects both the sun and our climate, but this undermines the importance of CO2 as a major climate driver.

The correlation is well known.  The mechanism is not.  AGM advocates have demonstrated that variations in the amount of energy reaching the earth from the sun are not sufficiently large to explain variations in earth temperature.  Fine.  That rules out one explanation of the correlation.  But it does not make the correlation disappear.  It is a fact that hangs there.

Years ago Svensmark hypothesized that variations in solar activity affected the amount of cosmic rays reaching the earth, and that cosmic rays affected cloud formation.  Variations in cloud cover driven by variations in cosmic radiation driven by variations in the sun, according to Svensmark, cause variations in temperatures and other climate variables on earth.

Svensmark has been dismissed by the climate science establishment.  This establishment has gone to great lengths to prevent testing of his hypothesis.  The multi-government funded, and very politically sensitive, CERN dragged its feet for years before grudgingly making resources available to test it.  The initial results, announced in late-August, do not reject the hypothesis, and are generally supportive of it.

If the establishment scientists were acting more like scientists than an establishment, they would have welcomed speedy and thorough testing of Svensmark’s conjecture.  If they were truly confident in the AGW explanation for climate change, they would have had nothing to fear from testing of an alternative explanation, and should have indeed wanted empirical evidence that would have allowed them to reject it.  This would have discredited “skeptics” and bolstered confidence in their preferred explanation.

But in acting like the Inquisition to Svensmark’s Gallileo, the establishment scientists betray deep insecurity about their explanation for climate variations–and no doubt their funding, which hinges crucially on the acceptance (not the correctness) of that explanation.  If the AGM hypothesis is indeed as strong as they insist, they would have nothing to fear from a rigorous test: yet fear is clearly evident in their continued efforts to squelch not just this research, but exploration of alternative hypotheses more generally.

This whole sordid tale reveals just how corrupting Official Science can be.  Big science funded by government becomes less like science and more like government: politicized, bureaucratic, and driven by vested interest and money rather than a strong desire to find the truth, the chips fall where they may.

The mechanism that Svensmark posited decades ago may be wrong.  Future tests may reject his hypothesis.  But absent surprising new empirical evidence, the Big Fact hangs there: there is a strong association between what happens on the surface of the sun and what happens on the surface of the earth.   That fact neither rises nor falls on Svensmark’s hypothesis to explain it.  The fact is antecedent to the explanation.  As long as that fact remains a fact, CO2-based explanations are tenuous, at best.

No existing climate model explains this correlation.  In real science, this should stand as a decisive rejection of those models, and the theoretical foundation on which they rest.  Until such models can explain this salient fact, little–if any–weight should be placed on the reliability of their predictions about relations between CO2 and climate variables.

The CERN CLOUD experiment has let some sun shine on the dark corners of climate science, and the view revealed is not a pretty one.  Much more sunshine is needed to purify the smelly orthodoxy that is establishment climate science.  Until that establishment can demonstrate a serious willingness to tackle a major empirical and theoretical challenge, it will have fully earned the oblivion to which it is currently headed, to the accompaniment of Al Gore’s lunatic ravings.

Double That for WWCD

Filed under: Economics,Politics — The Professor @ 4:27 pm

Another rhetorical horse that Obama continues to flog–and did so during his most recent epistle to the great unwashed–is to compare the US unfavorably to China.  This may send a tingle up the leg of Sinophilic dipsticks (self-censorship alert!) like Thomas Friedman, but it is deeply unpersuasive.

For one thing, the similarities between on the one hand a desperately poor country experiencing a burst of growth largely driven by (a) integration into the world economy after decades in isolation, and (b) an unbalanced, export-driven, price-distorting strategy that is not sustainable over the long run, and on the other a mature, market-based economy are very limited.  China needs to build infrastructure because, uhm, it has no freaking infrastructure.  And it has probably built too much, too fast, and too shoddily.  I remain a China bear.  But even given that, their economic and social conditions are so wildly divergent from ours that what might work for them is of limited instructional value for us.  Indeed, given the differences, imitation is likely to be wholly counterproductive.

For another thing, China is deeply unappealing as a social and political and yes environmental model, and those who find it attractive (see dipstick reference above) betray their power fantasies and fascist tendencies.  I do not say that lightly.  The frisson that 1920s and 1930s-era progressives got from the original incarnation of fascism was quite real.  Progressives have never overcome their infatuation with the use of state power to achieve their policy dreams.  For a progressive president (who has avowed his progressivism, so that is his label, not mine) to make favorable comparisons to China should be deeply troubling, yet it has received virtually no comment.

And no, I do not see Obama or his ideological or political allies tempted to emulate the CCP.  But the failure to understand the intimate link between Chinese economic policy and practice and its repressive political system does betray a willingness to rely on coercive, dirigiste, and statist means to achieve policy goals.  That was true in the 1930s, and it would be that way again, if Obama et al had their way.  It was detrimental to US economic recovery 80 years ago, and would be so today.  Not to mention the corrosive effects on individual liberties and personal autonomy.

So, when Obama says “we’re not doing what China is doing” I say: Amen to that.  My rough rule of thumb is as follows.  In answer to the question WWCD?, the best reply is: “The exact opposite, if possible.”

WWLD? I Really Don’t Care

Filed under: Economics,Politics — The Professor @ 8:12 am

During his “Pass the Bill” speech, Obama tried to persuade Republicans to support his plans for infrastructure spending–like fixing our congested skies, or something–by invoking Abraham Lincoln’s championing of the Transcontinental Railroad.  (Which was also the passion of Lincoln’s Democratic rival, Stephen Douglas.)

WW(insert-initial-of-role-model-here)D is an annoying and unpersuasive rhetorical trope.  During the debt ceiling controversy, Democrats or their media pilot fish would frequently invoke Ronald Reagan’s raising taxes in 1983 to attempt to persuade Republicans of the virtue of raising taxes today.  After all, WWRD?  Well, I couldn’t care less.  For one thing, it’s not 1983: circumustances are radically different today.  For another, Reagan was not unerring in his judgment, and indeed, what happened in 1983 is a cautionary tale about the pitfalls of agreeing to tax increases today in exchange for promises of spending cuts to come.

It is even more ridiculous to invoke Lincoln, for 2011 is certainly not 1863, and the Transcontinental Railroad was not at all analogous to some farcical high speed rail project.  Or fixing the skies.  How do you fix congested skies, anyways?  If you build more airports,wouldn’t that make the skies more crowded?  Can you build more sky?  That sounds terribly expensive–but hey, that means it would be really stimulative, right?  I’m so confused.

To see the inanity of this appeal, consider how Democrats generally, or Obama in particular, would respond to an invocation of Thomas Jefferson–the actual founder of the Democratic Party, in contrast to Obama’s ahistorical crediting of Lincoln as the founder of the Republican–to support a return to a minimal Federal government, with extremely limited and enumerated powers.  I’m sure at the mere mention of Jefferson’s name, Democrats would be falling all over themselves to slash spending, eliminate entire departments and agencies, terminate Obamacare, Medicare, Medicaid, and on and on.  You see, they’ve just forgotten that they are bound to adhere slavishly to Jefferson’s ideology, and would hasten to make amends on being reminded.  After all, WW(T)JD?

Actually, Obama showed exactly what he thought of any such idea in his speech, with one of his trademark false-choice, straw man arguments:

In fact, this larger notion that the only thing we can do to restore prosperity is just dismantle government, refund everyone’s money, let everyone write their own rules, and tell everyone they’re on their own – that’s not who we are. That’s not the story of America.

So I guess Jefferson (and libertarians generally) are un-American, and that Jefferson (and Jackson) are not part of “the story of America. ”  Good to know.

No.  Give the WW*D thing a rest.  It only appeals to weak, sentimental, and credulous minds, and is usually invoked by the manipulative.  Thursday’s speech being a case in point.

September 9, 2011

Yeah. Pass the Bill. By All Means.

Filed under: Economics,Energy,Politics,Regulation — The Professor @ 10:16 pm

I consider the entire $500 million plus squandered on solar panel manufacturer Solyndra by Obama the Beneficent to be an appalling combination of green (as in money)-worshipping crony capitalism and green unicorn-worshipping foolishness.  That said, I am deeply uneasy over the Masky Raid that was unleashed on the company soon after its bankruptcy.  Like R, I find it all too redolent of Russia (pace BP’s and Prokhorov’s recent tortures).

Perhaps there is a crime here, but given the increasingly pronounced predilection of prosecutors and law enforcement to engage in what appears to be more headline seeking than serious attempts to deal with true wrongdoing, I have my doubts as to whether the company engaged in serious malfeasance.

Either alternative explanation of recent events is disturbing.  Under one explanation, Solyndra was not a criminal enterprise, but just not an economically viable one that the government pumped nearly half-a-billion into.  In that case, there is no justification for a raid.  Under another explanation, Solyndra’s management was engaged in criminal acts–but the Department of Energy (which participated in today’s raid) couldn’t figure that out when it gave the company $585 billion in March 2009, or when the company restructured mere months ago.

In other words.  Case 1: an economically unsustainable but legally clean company is harassed by Big Brother.  Case 2: Big Brother is so incompetent that it couldn’t figure out that it was shoveling hundreds of millions of dollars into a criminal enterprise, and didn’t engage in proper oversight of such a huge debtor, and hence financed the operation of a criminal enterprise.   Hard to see another alternative.

The incompetence alternative gets a boost from Nobel Prize winning Secretary of Energy Chu.  DOE’s Inspector General participated in the raid, but Chu apparently thinks that Solyndra is a success.  Yes.  You read that right.  A success:

Mr. Chu’s spokesman argued that “the project that we supported succeeded. The facility was producing the product it said it would produce, and consumers were buying the product.”

Then I guess every firm filing through bankruptcy court is really a success.  Chu is obviously a brilliant physicist and an economic numbskull.  Which wouldn’t be the first time that’s happened.

Seeing what has transpired with the spawn of the first stimulus, by all means, let’s “pass the bill” so we can watch Son of Stimulus.  By Chu’s standards, it’s guaranteed to be a smashing success.

Mysterious Gloom?

Filed under: Russia — The Professor @ 9:46 pm

I like Edward Lucas’s reporting, but I did a triple take upon listening to the audio at this link.  He expresses puzzlement at the “mysterious gloom” that hangs over Russia’s middle class.  Gloom?  Russia?  Mysterious?  I thought “gloomy” was the default setting.  I guess I need to read Dostoevsky again.  Apparently I way missed the point.

Who Knew? Commodity Speculation Edition

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 9:41 pm

Gillian Tett has apparently discovered (via JP Morgan) that commodity production costs are a fundamental.  Who knew?

September 8, 2011


Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:58 am

August is over, but Russia suffered another devastating aerospace disaster: the crash in Yaroslavl of a Yak jet carrying a KHL hockey team.  Forty-three people perished, including an international roster of hockey players and coaches (such as Pavol Demitra, formerly of the St. Louis Blues).  My condolences to the victims and their families and friends.

Medvedev made a stop at the crash site, and before the cause of the crash was known, was already dispensing solutions, including the old Russian standby of industry consolidation.  Like that wasn’t predictable–and pathetic.

Insofar as causes are concerned, one report blames the crash on poor quality fuel:

Poor quality of aviation fuel could be one of possible reasons for why the Yak-42 plane crashed in Central Russia on Wednesday, killing more than 40 people, a source in the aviation industry said.

“The aircraft failed to gain the required engine takeoff speed and fell from a low height on a Volga riverbank. Refueling the plane with low-quality fuel is seen as a priority reason for the engine malfunction,” the source said on the condition of anonymity.

This is all the more interesting given this story from last week:

Deputy Prime Minister Igor Sechin gathered government officials to formulate a response to looming fuel shortages at the nation’s airports on Tuesday. Media reports had earlier speculated that Moscow airports’ fuel reserves had dropped to critical levels over recent days. Sechin announced at the meeting that a 10-day fuel reserve was to be created for the capital’s airports.

Rosaviation had earlier said that they would call on Rosrezerv to send 180,000 tons of fuel to Moscow airports in order to avoid a collapse in flight scheduling. Vladimir Putin was set to sign the order if necessary, his press-secretary, Dmitry Peskov, said on Tuesday.

Fuel in airports running out?

Kommersant reported on Friday that there was only three days worth of fuel in the capital’s airports. Sheremetyevo reserves were reportedly boosted to four days — about 20,000 tons — but it was done at the expense of other Moscow airports. The fuel crisis in the airports was first reported on Sep. 2 when Moscow airports announced that there was a kerosene shortage and supplies would run out in several days’ time.

Further recall that since the spring Putin has been browbeating refiners about the pricing of petroleum products, and that refiners had duly pledged to keep prices low.  There are no formal price controls (though the government did slap on high export duties to try to keep fuel prices lower in Russia), but in a place like Russia, a threat emanating from Putin can be a very close substitute for formal controls.

The events of the past week give credence to that interpretation.  What are the two predictable effects of price controls?  1. Shortages.  2. Declines in product quality (including adulteration).  Put it all together: government pressure to keep prices low, shortages, and if the cause of the Yak-42 crash indeed turns out to be a fuel quality problem, a decline in product quality.  It fits.

At this point, this is all conjecture.  But the conjecture is a plausible one, especially viewed in the context of the way Russia works.  The government intervenes–through scary threats–in a market.   Predictable consequences follow.  Sometimes these consequences are paid in inefficiency and inconvenience.  Sometimes they are paid in blood.

If one could trust the results of any investigation, it would be interesting to know whether fuel quality was indeed the cause.  The potential nexus between government conflict with refiners will make it even more difficult than usual to place any credence on the official findings.  That could cut both ways.  The government could want to use this as another cudgel in its ongoing battle with the refiners.  But on the other hand, such a finding could raise serious doubts about the wisdom of Putin’s bigfooting petrol prices.

So I will just say that this explanation is a plausible one, but that more definitive resolution is unlikely ever to be forthcoming.

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