Tautology of the day

from the FT article on hedge funds today (p. 13,"Ackman falls . . ."):

"The returns for hedge funds in 2015 overall were unsatisfactory because they lost money for investors," said Rick Sopher,LCH chairman, "However, once again the top managers outperformed the average hedge fund manager."

This sighting is, in fact, that of a particularly rare sub-species, the double tautology. But I repeat myself.

Most of the world's oil production is unprofitable at today's prices, figures the Economist

The Economist calculates that most of world oil production is unprofitable at $30. (The snapshot is at $40, still mostly unprofitable.) Their calculations, if correct, point to $100/barrel in the long run because that is what a lot of the production needs. I was guessing the the equilibrium price would be around $50 and I suppose I'll stick with that and point to Saudi Arabia's plans to increase its production in the future, which would indicate a lower equilibrium than that of the Economist, which assumes a static world.

They have a calculator that allows you to see which countries can produce profitably at a given price. Here's the link: http://www.economist.com/blogs/graphicdetail/2016/01/daily-chart-6?fsrc=scn/tw/te/bl/dc/st/adjustingthetapsonoilprice

New Hampshire Primary Update: Voters are cowed.

Vive la différence! France's secret defense against excessive immigration

In today's FT, which I am reading online because it still has not been delivered even once this year due to trouble with the paper carriers, there is an article on page 3 that says that asylum seekers consider France a stop-over and not a destination.

The reason? Here it is:




It's not so much the language that is difficult to master but more the pronunciation.  As Prof. Henry Higgins said in My Fair Lady, "The French don't mind what you say as long as you pronounce it correctly."

We have almost won the global war against extreme poverty

The World Bank defines "extreme poverty" as living on less than $1.90/day/person. By this measure, extreme poverty has fallen from almost 40% of the world's population in 1990 to less than 10% today, according to the World Bank.




The Wall Street Journal, in its "Outlook 2016" special section on January 20, 2016, where I got this graph, wrote: "Unprecedented economic growth over the past quarter century has lifted an estimated 1.25 billion people out of poverty, in one of the greatest recent (sic) achievements in human history."

The following chart from Branko Milanovic at CUNY, recently circulated by Prof. Zonis, is the flip side of this good news. The decline in world poverty has resulted from a partial equalization of incomes with the first world middle class.




The effects of globalization on middle class incomes are well known. This data shows that Trump is more correct about the source of the problem than is Sanders, although Sanders is also correct that the results are not desirable.

I think it safe to say, however, and I believe that I speak not only for myself but for the entire world, that we are all happy that extreme poverty has been so greatly reduced.

Oil supply/demand by the numbers

The difference between a cartel and a free market is that in a free market the high cost producer modulates supply by varying his production in response to price while in a cartel all members (in theory) vary production irrespective of cost. How this worked in the case of OPEC is that the low cost producer, Saudi Arabia, alone varied its production in response to price while the high cost producers always produced at capacity. 

The oil market has now flipped from a cartel to a free market. Price will be determined by the costs of the high-cost producer; oil will be priced at the cost of the highest cost producer whose production is needed to meet demand. Lower cost producers will produce at full capacity at all times.

So now that we are in a world where the high cost, not the low cost producers will have to adjust production to bring the market into equilibrium, let's consider the numbers of the high cost producers.

• The EIA says that excess production is about 1.5 million per day. Iran will add another 500,000-1,000,000 BPD in 2016
• The high cost producer is the Canadian oil sands, producing about 2.5 mn BPD.
• The next highest cost producer is the US shale oil industry, producing about 4.0 mn BPD.
• The marginal cash cost of producing WCS (West Canadian Select) is about $27/barrel (according to Suncor). (TD Securities says all-in breakeven averages $44.) This oil sells for $15/barrel today. (Producers have hedged to some unknown degree, however.)
• Already shale oil production is declining at a monthly rate of 100,000 BPD, so the reduction in the daily rate will be at least 1.2 mn BPD by year-end due to the lack of drilling.
• I don't know how fast Canadian production is declining, but since hedged producers can cash out of their hedges at any time and shut down, it could be precipitous or gradual depending on their expectations of future oil prices. (They move slowly because it is difficult and expensive to stop and restart production.)
• Demand ought to rise by 1.5 mn BPD by year end.
• Given the Canadian cost structure, I am guessing the equilibrium price is somewhere around $50/barrel.
• Conclusion: Assuming Saudi Arabia, Iran, Russia, et al continue producing as much as the can, the production trends are already in place that will bring the market back to equilibrium, perhaps by the end of this year. In the meantime, the price will be volatile.

Another comment on Iran and oil supply/demand

World oil consumption is 95 million barrels/day.

According to Vessels Value of the UK, Iran has 25 VLCCs with 56 million barrels. (This is at the high end of various estimates.) This is under one day's world consumption. It is important on the margin, but not decisive. 

 The important thing is how fast will the high cost producers (Canadian oil sands and US shale oil, which together produce about 6.5 million barrels/day) reduce their production. Canada is losing $15/barrel in marginal cash cost at $30/barrel WTI. (WCS, the Canadian benchmark, gets a $15 discount to WTI and costs just under $30/barrel to produce.) If these prices persist their 2.5 mn BPD will go quickly.