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.

Comparison of oil types by country

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. (more…)

Published in: on March 4, 2016 at 2:31 am  Comments (2)  
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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.

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

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

Published in: on October 13, 2014 at 7:54 am  Comments (8)  
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Just a Little Bit More Bitcoin Trouble

There has been so much tumult in bitcoin and crypto currencies over the past few days! Interest and concern extends beyond online communities. Motives vary.

screenshot of currency miner

Mining with Windows 7

Decentralized and anonymous

There are two conceptual pillars of trust that uphold bitcoin as being superior to fiat currency. The first is decentralization. The fiat currency of reference is primarily the US dollar, for the time being. Why? Because the $US is the world’s reserve currency, for now. It is highly centralized. As ideological (but not market) confidence in the $US has diminished, the appeal of an apolitical, alternative currency increases, especially one that is a fungible, stable store of value.

The second conceptual pillar of bitcoin is anonymity. US dollars held as cash will be anonymous until one wants to use them for exchange for commercial transactions of size. Bitcoin has some anonymity shortcomings, but there may be tractable remedies. That is a detailed discussion, widely covered elsewhere.

Centralization of bitcoin

All markets are game theoretic. Bitcoin is more transparently so.  I really wish we could ask Professor John Nash what he thinks of bitcoin! Nash wrote a pleasant, accessible article that described bitcoin-like currency, titled “Ideal Money” a few years ago. (more…)

Published in: on June 17, 2014 at 12:41 pm  Comments (1)  
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Taleb and the language of risk

Last night, I read about Nicholas Nassim Taleb on English Language and Usage StackExchange (EL&U). Professor Taleb wants to introduce a new word to the vocabulary of global financial collapse, antifragility:

So let us coin the appellation “antifragile” for anything that, on average, (i.e. in expectation) benefits from variability.

Consensus on EL&U was that this was a creative but unnecessary neologism. I echo the concerns of my EL&U comrades: Antifragility might cause confusion (maybe it is “anti-fragility”). There are many adequate, extant words that Taleb could use, however, antifragility is a term that will be uniquely associated with him.

I am not convinced that there are many entities that actually thrive due to uncertainty. A delta hedge that is long volatility is the only construct that I can think of off-hand. Perhaps that was what Taleb had in mind.

The original Black Swan

book cover of black swan with navy background

The Black Swan by Thomas Mann; 1954 UK First Edition

There was a slightly less contemporary black swan, the novella written by Nobel-prize winner Thomas Mann toward the end of his long and distinguished literary career.

The plot of that short fiction work also pertained to an anomalous event, one that could be considered a statistical outlier. (more…)

Published in: on February 1, 2012 at 6:28 am  Comments (8)  
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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.

(more…)

Published in: on November 20, 2011 at 4:28 am  Comments (2)  
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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.

Symbol of radiation hazard

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

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!

Published in: on April 2, 2011 at 3:43 pm  Comments (1)  
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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.

Published in: on October 18, 2010 at 9:00 am  Leave a Comment  
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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.

Published in: on August 3, 2010 at 9:31 am  Leave a Comment  
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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

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.

Published in: on July 7, 2010 at 7:12 pm  Leave a Comment  
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