Oil prices and OPEC influence

Light, sweet crude is the most desirable grade of crude oil because it requires minimal refining while producing the most gasoline. This chart is useful when considering geopolitical risk and commodities prices, as it illustrates where the “best” oil is.

Oil types by country (click image to view full-sized)

The chart was produced by the U.S. Department of Energy in 2012. Perhaps that is why West Texas Intermediate (WTI) crude is not listed, as the U.S. was not an oil exporting nation until recently, under President Obama’s administration, although we are not a net oil exporter.

OPEC

The Organization of Petroleum Exporting Countries has had varying levels of power since its founding in 1960 and heyday in the 1970s. Saudi Arabia has always been the controlling producer in the cartel. OPEC’s objective is to control oil price by either freezing production or cutting production.

Iran is an OPEC member.

The EPA is not the Federal Reserve of oil markets

Energy market pricing behavior seems contrary to the relationship between supply and demand. The oddly behaving RIN market is an intermediate factor that influences gasoline prices for automobiles. RIN (Renewable Identification Numbers) should be decreasing. Instead, they are too high.

Bio-fuel pricing anomaly

RIN establish compliance with standards for non-fossil fuel usage, specifically, for corn-based ethanol as a blend in gasoline. In 2007, legislation was passed to encourage greater use of ethanol. The percentage requirement of ethanol is set by the EPA. It increases annually, and is calculated at an aggregate level, measured volumetrically, over all U.S. domestic consumption.

My favorite energy blog, Platt’s Oil Barrel, featured a guest post* by former Special Assistant to President Obama and Senior Director for Energy and Climate Change of the National Security Council Jason Bordoff, explaining anomalous RIN price behavior, and what the EPA is doing about it. He noted two reasons for the seemingly anomalous pricing.

Hitting the blend wall

Renewable Fuel Standards (RFS) were revised in 2007, based on the assumption that gasoline usage would increase over time. In fact, it has not done so, not consistently. Instead, it decreased during 2011-2013, yet the schedule of increasing amounts of ethanol has remained, as legislated. As a result, according to Bordoff, we are now hitting the “blend wall”, when blenders physically cannot put enough ethanol into the gas supply to comply with RFS law.

Bordoff identified a second reason:

broad-based skepticism in the market that EPA will use its waiver authority to avoid the blend wall—even though EPA just went to unusual lengths to signal precisely that it will.

Federal Reserve v. EPA: Powers and purpose

The bio-fuel situation bears an odd resemblance to the rational expectations based logic of monetary policy. It is difficult for the Federal Reserve to effectively signal to markets, e.g. the anticipated (and appropriate!) end of quantitative easing. The Federal Reserve System has taken measures to increase transparency. Fed Governors Bernanke and Yellen hold scheduled press conferences. Bernanke was the first Federal Reserve governor to do so. The Fed was audited by the GAO in 2012. Federal Open Markets Committee (FOMC) meeting notes are published and posted online.

wow.. just wow.. Citi talking of QE4 now with inflation expectations collapsing pic.twitter.com/ZzH2u7nrA8

— Chris (@lebullmarche) October 8, 2014

The Fed also has the necessary tools to carry out monetary policy e.g. quantitative easing known as QE.

@lebullmarche @LadyFOHF OMG | QEn s.t. n = 1 ~> ? It is unnatural. Fed wasn’t intended for this; is worse than a centrally planned economy

— Ellie Kesselman (@EllieAsksWhy) October 8, 2014

Despite all of the above, the “job creators” aren’t investing, and the Fed is now contemplating QE4.

Economic Models for Turbulent Times Part 2

A new research study has already received unusual attention. The Network of Global Corporate Control [PDF] discovers a relatively small group of multinational companies with disproportionate influence over the global economy. The authors, a trio of complex systems theorists at the Swiss Federal Institute of Technology in Zürich, are supposedly the first to empirically identify such a network.

The problem is approached using mathematical models designed for capturing behavior of complex natural systems. The study applies this methodology to a large data set of corporate information, to map ownership among the world’s transnational corporations (TNCs). Previous studies reported that a few TNCs drive much of the global economy. However, they analyzed fewer companies. Due to limited data availability and computing resources, past studies did not consider the effect of indirect ownership.

Methodology

Orbis 2007, a repository of over 30 million private and public companies, published by Bureau van Dijk, was the data source. The study sample used the 43,060 largest TNCs, and derived the associated ownership linkages. The network structure was based on the relationships between shareholding interests, then weighted by each company’s operating revenue. This yielded a directional map of global economic power.

Quantitative results

The model revealed a core group with networked ownership, see image below. These 1,318 companies:

• all had ties to at least two other companies in the core group
• on average, were each connected to 20 other core group companies
• represented 20% of all global operating revenues,
• collectively owned the majority of the world’s largest blue chip and manufacturing firms:
• in total, generated 60% of all global revenues.

Risk perception and reality

This is an excerpt, selected by Moi, from the article Risk perception, a recent post that appeared on the Soapbox Science Blog, Nature Publishing Group.

Universal symbol of radiation and fear. Image via Wikipedia

Sometimes, no matter how right our perceptions feel, we get risk wrong. We worry about some things more than the evidence warrants (vaccines, nuclear radiation, genetically modified food), and less about some threats than the evidence warns (climate change, obesity, using mobile phones when we drive). That produces a Perception Gap, the gap between our fears and the facts.

The Perception Gap produces dangerous personal choices that hurt us and those around us (declining vaccination rates are fueling the resurgence of nearly eradicated diseases). It causes the harm to health of chronic stress (for those who worry more than necessary). And it produces social policies that protect us more from what we’re afraid of than from what in fact threatens us the most (we spend more to protect ourselves from terrorism than heart disease)… which in effect raises our overall risk.

We do have to fear fear itself…too much or too little. So we need to understand how our subjective risk perception works, in order to recognize and avoid its pitfalls.

Here was the take-away for me: Societal risk management has to recognize the risk of risk misperception–  recognizing the risk that arises when our fears don’t match the evidence. This is truly the risk of The Perception Gap. It has always been relevant, and becomes so once again in light of the recent E-coli outbreak in northern Europe. The Guardian UK used that as a starting point for a well-written and up-to-date article about the hazards of risk misperception and the consequences of irrational behavior.

Kahneman and Tversky did extensive research on this topic. I am not concerned whether articles like the one referenced above are derivative, in the sense of revisiting past work. Possibly it is an application in the context of current events. Or it may be entirely original new work. My concern is solely that there is an awareness of the reality, and that it be acted upon.

Fair Square Review Update

Square Inc. recently released an update for Square, its wireless payment system product.

What is Square?

Square is both software and hardware. It turns a wireless device into a radio-based credit card. Square is compatible for use with devices running Apple’s iOS software or the Google Android operating system. According to a recent review by iLounge,

Pay with Square

Square released its first-generation hardware and software in 2010. Use is subsidized by a per-transaction fee of 15 cents

plus 2.75 – 3.5% depending on whether the card is physically swiped or data is entered with a keyboard. Now the company has a second-generation version of the Square Credit Card Reader and version 1.5 of its free Square IOS app and has eliminated the 15 cent transaction fee.

Although the per-transaction fee went zero, fees per transacted amount remain. These fees do become significant, as they increase sharply above a certain threshold.

Target user profile

Square is unsuitable for most high-dollar users, per transaction, and overall high volume. Square is best for occasional transactions for small amounts of money. Pricing is better than PayPal’s money transfer system under these circumstances.

Minimal fraud protection

Square initially sets a limit of $1,000 per-week for transfer into your bank account. If you’re doing more than $1,000 per week in transactions, there should be a delay before the excess drops into your bank account, reducing potential for huge, fraudulent transactions. The details weren’t specified in detail at this time.

Be aware of recent VeriFone allegations about security issues. VeriFone’s revenue has been very adversely affected by the success Square has achieved to-date. VeriFone should be considered a competitor although it is a traditional payment processor, unlike Square. The validity of the allegations is unknown.

Competition

Square will soon be experiencing the effects of comparable, competitive technology though:

• American Express released a payment product, Serve a few days ago
• Intuit’s GoPayment uses similar technology as Square, but different marketing, specifically, an up-front credit approval requirement and slightly different pricing.

Expect much competition for market dominance ahead!

Industrial Production and Capacity Utilization

The Philadelphia Branch of the Federal Reserve Bank released its September 2010 Industrial Production and Capacity Utilization report this morning. It is an interesting economic indicator, due to its frequency (monthly), timeliness (within a fortnight of the prior month-end), and long history of well-documented tracking, readily available from 1972 through the present.

The salient number, based on my review and recall from past days of buy-side proprietary trading of fixed-income securities, is the capacity utilization percentage. This is why:

• Rising industrial production levels, in absolute terms, were driven by technological progress in manufacturing methods, more than increased economic activity.
• The same can be said for capacity, although the Fed does provide helpful indexing as a percentage of the historical peak level in 2007.
• Utilization is the percentage of actual capacity used for production, which indicates to me the level of demand  required for actual goods (not services!) and thus the demand for U.S.-manufactured industrial products, as a percentage of the maximum possible supply that could be produced.

The preliminary annualized utilization for September 2010 is 74.7% of capacity. This is well below the yearly average of 80.6% from 1972 through 2009. However, utilization of capacity has increased from the 2008-2009 low of 68.2%, as well as the September 2009 value of 70.5%. While I feel some concern about the economic situation in the immediate months ahead, it is encouraging to note the breakdown by process stage:

• For crude production, the operating rate increased 0.7% points to 86.9%, almost half a point higher than the 1972 to 2009 average
• For primary and semi-finished stages, utilization declined 0.6% points, to 71.5%, about 10.1% points below the long-run average
• For the finished stage, utilization decreased 0.1% points to 73.8%, about 3.7% points below the long-run average

If crude production rates drive primary, semi-finished and finished stages, then the more historically comparable rates of crude manufacturing will perhaps carry through into the later stages of production in the next three manufacturing reports of the fourth quarter of 2010.

*Note that for the purposes of this Federal Reserve Statistical Release, the industrial sector is comprised of manufacturing, mining, electric and gas utilities, as well as the logging, newspaper, periodical, book, and directory publishing industries.

High-speed rail from China to California

Earlier this morning I was reading a surprisingly, pleasingly blunt BBC article, about California’s trade mission.  The actual title is Arnold Schwarzenegger sells California to East Asia! While visiting, Governor Schwarzenegger wanted to have a look at the latest high-speed passenger rail transportation technology.

The State of California, with its $19 billion deficit, is investigating public transportation alternatives used in other parts of the world. Japan is interested in contracting to build the trains and loaning California the money to pay for the work. China is too.

How high-speed rail came to China

China has the world’s longest high-speed rail line. However, the expertise to develop and build it was largely contributed by European and Asian countries with advanced technological skills in everything from control systems to laying tracks.

When the Japanese and European companies that pioneered high-speed rail agreed to build trains for China, they thought they’d be getting access to a booming new market, billions of dollars worth of contracts and the cachet of creating the most ambitious rapid rail system in history.  What they didn’t count on was having to compete with Chinese firms who adapted their technology and turned it against them just a few years later.
—Train Makers Rail Against China’s High-Speed Designs

There will be some fascinating intellectual property issues should China decide to enter the high-speed rail market as a producer and exporter, given the origins of the technology.

China will also experience market-based challenges in the form of competition from countries such as South Korea, who has worked in a contractual arrangement with the EU’s high-speed TGV passenger rail. Both South Korea and Japan would be eager to work with U.S. government or government-funded entities, whether state of federal, in upgrading our nation’s passenger rail service.

California’s fascination with rail transit

California’s history with high-speed rail goes back to 1982, during the days of Governor Jerry Brown. With just a single law, Brown created a California High Speed Rail project and exempted it from California Environmental Quality Act rules. In 1996, the state legislature created a High-Speed Rail Authority. Last year, the California State Auditor expressed some concerns about the state’s High-Speed Rail Authority: “It Risks Delays or an Incomplete System Because of Inadequate Planning, Weak Oversight, and Lax Contract Management”.

Re-patriation initiative

Demanding transfer of advanced technology from foreign companies, in exchange for access to China’s vast domestic market, has become something of a Chinese national economic strategy.  Despite being forward-looking, China is already encountering challenges that come with a global race to the bottom.

Shanghai authorities have revealed that they are using a database of Chinese students studying abroad in a bid to attract top talent back to the city. The database is populated with information corresponding to Chinese students attending the world’s top 100 universities…
—Student database used in Chinese “re-patriation” effort

Spam Expands In Space-Time

As data usage expands into new dimensions, from 2-D print to the internet and now geolocation, spam will tag along.

Foursquare is offering an essentially useless promotion, a Starbucks frappuccino special that is taking on a distinctly spam like aspect: It’s a low-value offer available only to a tiny number of people.

Tod Maffin noted that the ubiquity of Starbucks, with the chain’s next-to-worthless Foursquare offer, poses a serious challenge to the app’s usefulness. It is location spam, LBS spam or “Something You Aren’t Interested in Nearby!”

There are more Starbucks in this city than stop lights. One intersection even has two Starbucks! That means that pretty much any time you use Foursquare in Vancouver, you’re going to get an offer from Starbucks.

Problem is, the Starbucks offer is lousy. It’s only for the person who has checked in the most — and even then, it’s a cheap offer: $1 off a limited number of their cold beverages.

Negative benefits

Apparently the law of diminishing returns from too much advertising can move on to a second phase of dis-utility, which actually drives customers away. This is an even worse outcome than not advertising at all!

Forrester gives the concept some in-depth coverage: Foursquare Advertising Getting Less Interesting.

Evolution Robotics

Bias is bad. My prior post could be misconstrued as pejorative commentary, unfairly targeted at Tweetup, an innocuous, and free-of-charge, client application for users of the Twitter micro-blogging service.  Twitter certainly is responsible for the silly avian-themed jargon that is steadily seeping into common vernacular, undermining my ability to sound impressive when pretentiously blathering away, as I’m doing right now. However, Idealab, the owners of the Tweetup social influence metric software did not create the Cult of the 140 Character communication standard.

Tweetup is actually one of many applications, services and bona fide products offered by holding entity Idealab.  This Pasadena, California based company has a refreshingly original and diverse assortment of creative product offerings. In fact, Idealab is no parvenu, having existed as a going concern since the 1990’s, all the while fostering an impressive  range of mostly feasible technical innovations.

Supermarket Loss Control by Evolution Robotics

I was quickly riveted by the Idealab site’s video demo of their TunnelHawk system. TunnelHawk’s design imperative is to mitigate retail store losses due to customer and employeee theft.  To make clear that I am not predisposed against Idealab (in the aftermath of my earlier Tweetup monetization tirade), I am featuring a product video of IdeaLab’s clever response to supermarket petty theft,  the robotically driven TunnelHawk supermarket checker.

Idealab: Evolution Robotics Retail TunnelHawk Video.