Saturday, August 5, 2017

More on Income Inequality

Apropos of my blog post on income inequality here, there has been a new study which opines on the reason behind certain people's willingness to suffer sub-optimal outcomes in order to lessen inequality. A summary of the study can be found here.

The money shot? "This willingness to hurt the poor to pull down the rich was predicted only by the individual's proneness to envy."

Read it in full, very interesting.

Tuesday, July 7, 2015

Trump for President?

I have a prediction to make: Donald Trump will not actually run for President. His current antics are nothing more than a means to get himself, and keep himself, in the spotlight as long as possible. He's hopelessly narcissistic. He likes to hear himself talk so much that he doesn't even realize how moronic he sounds.

The most likely reason that Trump will bow out? Financial disclosure. He says that he's worth $8 billion, but I don't buy it. He can't lie on federal disclosure forms.

The upside is that when Trump bows out, much of the 10% or so of the electorate which supports Trump will swing to the only other straight talker in the race: Chris Christie. While Christie doesn't have the populist schtick which attracts people to Trump, he's certainly got the gumption.

If I get time, I'll write a post on why Christie deserves more of your attention.

Wednesday, December 3, 2014

Email to Author of Article Critical of Peak Oilers

Here an email that I just wrote in response to this article by David Harsanyi.


With all due respect, you misunderstand Peak Oil. Just so you know, I am a Federalist-reading conservative in the oil business.

Nobody says we are going to run out of oil. Rather, people say that oil will become so hard to extract that the economic consequences of the cost of a marginal barrel will be catastrophic. These are vastly different things. One other note: we may have a lot of natural gas in the US, but gas is not a perfect substitute for oil in anything but the very long run.

Please bear with me and you may understand what I am talking about.

People are talking a lot about the recent decline in oil. Before we get started, please note that oil is a global commodity, but it is priced in dollars. The decline in oil price also corresponds perfectly to an increase in the dollar. On a PPP basis, global oil has declined by 10% over the last several months, not the 20% in the US. This is important when thinking about global Peak Oil issues. The decline is minimal.

For most of modern history, except for the 70s and today, the real price of oil was very steady at about $20/barrel. See here:

So, at $80/barrel, oil today is about $60 over the long-term real average. And this is with oil at a very low price, according to you and others.

Let’s do the math.

We consume 7.3 billion barrels/year in the US.
7.3B X $60 = $438 billion
150 million households in the US
438B/150M = $2,952 per household out of discretionary income.
$3K from the median household in the US is depression-inducing.

Ask yourself why the price of oil is $80 and not $20. Why do we have to frack?

That’s Peak Oil. It’s only going to get worse.


Matt Finlay

Wednesday, August 20, 2014

War Is Not The Answer...

The beheading of American journalist James Foley by the Islamic State yesterday keeps making me think of the people who ride around with bumper stickers on their cars which say "Peace" or "War is not the Answer."

How's that Peace thing workin' out for ya?

Sure, I'll admit that peace is a wonderful thing - who wouldn't? And I'd go even further to say that war is definitely not the answer... until it is. But those bumper stickers rub me the wrong way because they don't even allow for the possibility that the world might want to stop, say, Hitler.

It is woefully na├»ve to believe that there are not really evil people out there trying to do all sorts of bad things to other people. Sometimes, it becomes necessary to beat those people back with what might be called war. By foreclosing that possibility before it even becomes necessary, one only emboldens the bad guys.

I very much like the saying that abortion should be legal and rare. There's a similar thought which should prevail about our military: it should be strong, vocal, and mostly idle.

How about a new bumper sticker: War Is Not the Answer... Until It Is.

Saturday, January 25, 2014

Individual Mandate: DOA?

For the most part, Americans are law-abiding, ethical people. We pay our taxes and mortgages, we comply with contracts, and we suffer through long lines and surly clerks to register our cars. To a certain extent, we do these things because we don’t want to pay the consequences of not doing them. But it is also true that Americans obey the law because we see the law as an extension of our shared morality. We are citizens, and citizens adhere to the social contract.

Having done business extensively on every continent except Antarctica, I can say with confidence that there are parts of the world where the law and contracts are viewed as annoyances, rather than prescriptions for behavior. As a proxy, consider that NGO Transparency International ranked the United States 19th out of 177 countries in its 2013 Corruption Perceptions Index. I would propose that being nearly tenth percentile is high for an enormous, heterogeneous country such as the United States. It may suggest that even our numerous lower income immigrants are an ethical bunch.

In short, with modest exceptions, we prefer to obey the law. I think to a certain extent, the opposite is also true; if a behavior or undertaking is not against the law, we tend to view that fact as a license to partake in such behavior. We’ll have a chance to see how this theory plays out in Colorado, where as of January 1, citizens are free to buy and smoke marijuana free from government intrusion. But that is another subject.

It is because of this corollary to my original thesis that I think the individual mandate, and thus Obamacare itself, will eventually founder.

As we all know, the Affordable Care Act of 2010 includes a provision stating that every American adult is required to purchase health insurance. This “individual mandate” was drafted in order to guarantee the solvency of insurance plans, the profitability of which were to be tested by several other provisions of the Act. Most notably, the ACA requires that insurance plans accept enrollees with preexisting conditions.

In order for insurance companies to shoulder the burdensome cost of these new, sick participants, they would need a slate of young, healthy participants with low health care costs relative to their premiums. Thus was born the individual mandate, requiring healthy people who might not otherwise purchase insurance to do so. Under the original reading of the Act, it was against the law to live without health insurance. If you broke the law, you’d have to pay a fine.

Opponents of the ACA took it to court. Ours is a constitution of enumerated powers, they said, and nowhere does the document say that the Federal government has the power to compel citizens to purchase a good or service like insurance. Obamacare seemed doomed. The Roberts court, with its tenuous conservative majority, was thought to be much less willing to stitch together such powers out of whole cloth than its predecessors.

The country held its breath while the court deliberated. When the verdict came in, it was the Chief Justice himself who wrote the opinion preserving the ACA. You wouldn’t have to pay a fine for breaking the law, he argued, but rather you would simply have to pay a tax. The authority was vested in the power to levy taxes.

Liberals cheered the decision while scratching their heads a bit, and conservatives abandoned Roberts in droves. Very few people, though, wondered about any troublesome implications of the decision. It was off to the races! Obamacare would soon be implemented, and all Americans would finally have healthcare coverage.

I am deeply convinced, however, that the court’s decision has robbed the individual mandate of its moral compulsion, and thus a significant number of individuals will choose to pay a small tax rather than sign up for expensive health care premiums. The economics of the ACA will be destroyed, and insurance companies will be required to raise premiums dramatically, or the law will need to be adjusted.

Imagine a hypothetical conversation between a father in Dubuque, Iowa calling his 27 year old struggling actor/waiter son in New York City.

“Have you bought your health insurance yet, David?”
“Uh… no dad.”
“It’s the law. You need to go on today and get yourself some insurance.”
“I looked.”
“I can’t afford it!”
“Doesn’t matter.”
“Plus, it’s not against the law. All I have to do is pay a small tax.”
“That’s not true..”
“Yes it is, dad. I read about it in the New York Times. All my friends are talking about it. Nobody’s going to buy insurance.”

Early indications suggest that this is indeed happening. Young people are not signing up for insurance in significant numbers yet. A majority of those who have signed up seem to come from the pool of already insured who are simply switching plans for one reason or another. If the trends continue, Americans may be in for a nasty surprise in 2015, especially once the employer mandates kick in.

There are many possibilities for what happens next if this comes to pass, but one thing is for sure: Obamacare and the Democrats will suffer. The direction we take in fixing the problem will depend heavily on who wins in the 2014 midterms and the 2016 Presidential election.

Thursday, August 8, 2013

Peak Oil is Dead?

The world’s press has been effusively promoting a new story line about energy: the Peak Oil theory is dead. The shale revolution killed it. North American production of liquid fuels is growing again, and soon enough, the US will be a net exporter. OPEC is in trouble as oil prices are about to fall, and members’ subsidized supply and generous social programs are at risk. National deficits and social unrest may follow.

In addition to the shale story, there are several other components to this new worldview:

·         For the fourth straight year, demand for crude oil in OECD countries has fallen

·         Renewable power generation has increased significantly, led by new hydropower in China, wind in North America and solar in Germany

I don’t buy it.

First of all, those who claim that we have entered a happy new world of energy abundance have to account for the fact that energy is now more expensive than ever. To the right is a chart of the price of a barrel of oil since we first started pumping it out of the ground in Pennsylvania 150 years ago.

If oil is flowing so freely, why is it so damn expensive? Greedy speculators are not the answer. Speculators don’t care whether the price of oil goes up or down – they make money either way. Did they cause oil to briefly drop to $30 at the end of 2008? Furthermore, if oil prices are too high by $40 or $50, as some people suggest, then where the heck is all that profit going? The world consumes 80 million barrels per day. That would equate to $1,500 billion in annual excess profits. Where is it? That’s 210 times the profits of Goldman Sachs last year. Commodities traders make up only a tiny fraction of their profits. Oil companies don’t have that kind of money either – look at their cash flow statements and you’ll see that most of their money is being spent on operating costs or development.

 Furthermore, the causes of this supposed new reality are simply window dressing. The much larger macroeconomic drivers which fueled Peak Oil theory are still intractably at work. Let’s take them in order:

Growing North American supply: promoters of this story point out that North American production has recently increased by approximately one million barrels per day (bpd). While this is true, it is partly a gimmick: the conversation is now about total liquid production, instead of crude oil production. The lions’ share of this gain has come from increased natural gas liquids and refinery gain. You can’t run your car on natural gas liquids, and refinery gain is being generated because we’re using heavier oil, which is also more expensive to transport and refine. In addition, as mentioned previously, the world consumes 80 million bpd. Even if all of the increase is refined and consumed, that increase equates to a whopping 1.25% of global demand. This hardly seems like a change which would cause us to utterly alter our worldview. Finally, and most importantly, depletion rates for fracked shale wells are considerably higher than for conventional wells. As conventional production is replaced by shale production, the supply problem might be getting worse, not better.

Declining OECD demand: It is also true that crude oil consumption in developed economies has declined recently. We’re insulating our houses better and driving more fuel efficient cars. This is all good. But did anyone notice that the world’s developed economies have been in the doldrums for about four years, too? Is it possible that these two phenomena are linked? As far as I can tell, nobody has rebutted the seemingly ironclad relationship between wealth and energy consumption (see here). We’re driving Priuses but we’re also consuming less oil because we’re not taking vacations to Hawaii like we did in 2007.
And in a subtly different but related point, isn’t it possible that this declining oil consumption is also due in part to high energy prices? And yet now we’re celebrating this wonderful new fuel efficiency because it’s going to lead to much lower energy prices. Frankly, I find the argument bizarre.

Finally, and most importantly, the residents of OECD countries are already rich, and already consume massive amounts of energy. But the residents of OECD countries are only 18% of the world’s population. The benefit of a small marginal decrease in their consumption will be absolutely swamped by the increase of consumption by residents of the third world as they move into the middle class. There are 700 million peasants in China who would like to live like Americans. Getting them there will make all of our Prius driving irrelevant when it comes to Peak Oil math.

The rise of renewables: There is more confusion and misunderstanding about this issue than any other in the current energy debate. The sad fact is that, even after hundreds of billions of dollars of investment, wind and solar power combined generate only 3% of our total energy supply in the United States. Hydropower generates a considerably greater percentage, but we are essentially at the limit of that resource. We’ve already dammed the most obvious rivers. Environmental and transportation concerns preclude significant new hydro resources. As much as I hate for it to be true, we will bankrupt ourselves if we attempt to replace liquid fuels with renewables over anything but the very, very long run.

The reality is that the macroeconomic conditions which caused people to be concerned about our hydrocarbon resources have not changed. If anything, they have gotten worse in the last ten to fifteen years as economic development in China and India have proceeded at a pace greater than anyone ever thought possible.

 Part of the confusion, I think, lies in the fact that most people are unaware of the subtleties of Peak Oil theories. Peak Oil is popularly described as a theory which says that we are running out of crude oil, and that once the death spiral starts, the world will be plunged into a Road Warrior-like dystopia. While there are indeed believers in this bleak future, most thoughtful Peak Oilers describe a more extended version of the slide, where the initial signs of Peak Oil are primarily reflected in high prices and a gentle plateauing of energy production. Gains in prices are met with capital investment to reap higher profits, but also cause economic shocks. The world slips in and out of recession as economies adjust to new, higher energy prices. The world will never actually run out of oil, it’s just that the marginal cost of new barrels will rise so high that it’s quite irrelevant.

 Does this scenario sound familiar? (See my post of January, 2009 (!) for my own prognostications on the issue). Eventually, even these more optimistic Peak Oilers believe that production will eventually slide downward with ever more devastating effects. How long that takes depends on who you’re talking to.

Another reason why I think people have misunderstood the dynamic of crude markets is that they are using an incorrect definition of marginal cost. In traditional economic parlance, marginal cost relates solely to Cost of Goods Sold – the true operating costs of extracting oil from the ground: depreciation of the well capital investment; labor for the rig workers; variable costs at the plant like fracking water and chemicals. But the oil world has changed. Extracting oil from the ground is not quite as simple as poking a hole in the ground and conjuring up a gusher.

 The world rejoiced a few years ago when Petrobras confirmed the existence of approximately 7.5 billion barrels of light, sweet crude off the Brazilian coast. Everyone said, “See? We’ve got plenty of oil!” Unfortunately, the oil is located in a spot where the ocean floor is 1.2 miles below the surface, and, once there, the drill has to venture through another 3.0 miles of almost impenetrable salt, sand and rock. Getting all those barrels out of the ground will cost staggering amounts of money. What is marginal cost in that case? The cost of the rig, labor and consumables are only a part of it. Just to start a program like that requires tens of billions of dollars in overhead: engineers; consultants; lobbyists; bureaucrats; and specialists of every sort, not to mention the costs of safety, insurance and environmental protection. In effect, the marginal cost of that oil becomes the entire cost side of the Petrobras P&L. And for what? 7.5 billion barrels of oil is about three months of global demand. Big whoop.

Now, I’m not saying that the price of oil will never go down again. Like the stock market, the price of oil will go up, and it will go down. But I truly believe that the medium and long term trend is only up, and maybe substantially. Further, if price does go materially down, it’s not because we’re driving yet more Priuses or Teslas, it’s because the world economies have taken it on the chin again like 2008.

If it sounds like I am pessimistic, it’s because I am. However, I am also a true believer in the power of human spirit and ingenuity. I believe we’ll muddle through the problem, but it’s going to be rocky. Ironically, if you’re worried about climate change, Peak Oil is actually a good thing. Here were Obama and Steven Chu wanting to furtively increase the price of oil to choke off demand. If I’m right, it turns out they can just sit back and watch Mother Nature and the laws of economics do their work for them.

Sunday, February 10, 2013

Sophist in Chief

“But we have always understood that when times change, so must we; that fidelity to our founding principles requires new responses to new challenges; that preserving our individual freedoms ultimately requires collective action. For the American people can no more meet the demands of today’s world by acting alone than American soldiers could have met the forces of fascism or communism with muskets and militias. No single person can train all the math and science teachers we’ll need to equip our children for the future, or build the roads and networks and research labs that will bring new jobs and businesses to our shores. Now, more than ever, we must do these things together, as one nation, and one people.

Barack Obama, Inauguration Speech, January 21, 2013

It’s been several weeks since Obama’s inauguration and I can’t seem to get these thoughts out of my head. I am vexed, and can’t let it go.

Frankly, I find it disturbing that a President of the United States would elevate such an ill-conceived straw man to such an eminent place in such an important speech. As if anyone - anyone! - has ever suggested that a single person might train all our math and science teachers, or build all the roads and networks that we require.

And yet it is even worse that he would construct an elaborate non-sequitur upon this gobbledygook of a premise. For it is sufficient that men, acting alone and in their best interest, might collaborate to build things both great and small. To call these efforts collectivism is simply wrong.

The most excellent exposition of this point I have ever read is the essay I, Pencil (link here). I was introduced to this gem by pundit Jonah Goldberg, who invokes it regularly when confronted with sophistry such as Obama’s speech.

If you are tempted to think that Obama was simply saying that it’s great that we all get together to get things done, maybe even while acting alone and in our best interest, I would point out that this is a patently obvious principle. Why would anyone go to great lengths in a speech to point out something so plainly obvious? Furthermore, please note that Obama began the paragraph with the word “But”. If you go back and read the speech, the prior paragraph was about “initiative and enterprise...hard work and personal responsibility.”

No, Obama was after something more in this speech. He wanted to use a string of soothing words to furtively make a case for his ideal of collectivism - a collectivism where, out of a sense of fairness, government redistributes wealth and is the solution to everyone’s problems. And he used a sloppy, illogical argument to get there. Sorry to be petty, but I just had to call him on it.

Now, don’t get me wrong: there are plenty of logical, consistent arguments for collective action, regulation, redistribution, etc. I am simply pointing out that the argument that Obama made is not one of them.