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.

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