econscius

Archive for the ‘Oil’ Category

George Soros, Convicted of Insider Trading

In Financial Fraud, George Soros, Oil on March 25, 2012 at 11:54 pm

Convicted and upheld. 

Those are the facts about George Soros and insider trading.  Soros is a prime financial backer of many groups from the Left, some affiliated with Occupy groups.  Soros was quoted as saying he shares Occupy goals. [3]  It is ironic, indeed, the money man behind many groups like ThinkProgress joined the ranks of convicted inside traders himself in 2002.

Oct. 6 (Bloomberg) — Billionaire investor George Soros lost a challenge to his 2002 insider trading conviction, with the European Court of Human Rights saying French market regulations were clear enough to hold him responsible.  France didn’t violate Soros’s rights in punishing him criminally for trading on inside information about Societe Generale. [1]

A brief overview of Soros-affiliated groups may be found in note 2 below.

[1] http://www.businessweek.com/news/2011-10-06/soros-loses-case-against-french-insider-trading-conviction.html

[2] http://www.humanevents.com/article.php?id=42674

[3] http://www.ibtimes.com/articles/224767/20111004/occupy-wall-street-protests-banks-bailout-george-soros.htm

 

Yes, There Are Lots of Tax Loopholes!

In Income Tax Rates, Oil, President Obama, Tax Breaks on October 18, 2011 at 1:11 am

Yes, there are lots of tax loopholes!  You can hardly step anywhere in the personal or corporate tax codes without falling into a loophole.  Most every tax break was created in the name of helping a good cause (e.g. electric cars) or encouraging people or corporations to buy of something (e.g. homes or ethanol).  Still, the loopholes reduce tax revenue and add great complexity to the tax code.

 You can see for yourself how ridiculous the tax code is simply by looking at IRS Publication 946 at http://www.irs.gov/pub/irs-pdf/p946.pdf.  Be forewarned: it is large .pdf file.  Do not blame the IRS, they are simply enacting what various Congresses and Presidents have put into law. Econscius thinks these 118 pages, which merely cover tax rules for depreciation, are a microcosm of what is wrong with the tax code.  These 118 pages are a like a few drops of water in the lake of tax complexity, too.  But I assume most readers will be perfectly fine with just one helping of accountant-speak. 

What is Depreciation?  When a company buys an asset like a railroad car, it is not allowed to expense the $100,000 cost right away.  The cost is expensed in little pieces over its theoretical ‘useful life’ of, according to the IRS table, 15 years.  Or seven years if the company is using an accelerated depreciation method. 

What is Accelerated Depreciation?  In order to encourage companies to purchase more assets, e.g. more airplanes, the Tax Code includes the ability to depreciate many assets more quickly than their ‘useful life’.  A 15 year asset may be deducted in seven years.

From a taxpayer’s standpoint, accelerating depreciation is valuable.  Increasing your expenses today means less income and less income means less tax paid.  In theory, the government gets all the tax money in the long run but the fact that the deductions are sped up is valuable because of what we call ‘the time value of money’: because of inflation, a dollar today is worth more than dollar five years from now.

I challenge anyone, Left or Right, to skim through the 118 pages and tell me the tax code is not unnecessarily complex.  There are loopholes aplenty, lying right before your eyes. 

On pages 25-28, we find the Gulf Opportunity Zone break, enacted after Hurricane Katrina.  There’s the Qualified Cellulosic Biofuel PLant Property benefit on page 28.  There are extremely generous accelerated depreciation rules on electric cars on page 66.  There are special depreciation rules for Indian Reservations on pages 38-39.  Fruit and nut trees and vines are covered on page 42.

Table B-1, which runs from page 103 to page 112 is a fine print example of tax loopholes.  You will notice there are different columns as there are different depreciation methods.  We can skip the mind-numbing complexity of GDS (MACRS) vs. ADS depreciation to make a few simple points:

(1.) Whenever the GDS and ADS depreciation recovery periods are different, we are really talking about a tax break.  The different method means a potential tax break because companies can depreciate more quickly than the true ‘useful life’ of the asset.  When you look through the IRS Publication 946, you see how most classes of assets do, in fact, have some sort of accelerated depreciation option.

(2.) Are so many classifications really necessary?  There are special depreciation rules for Cable TV-Microwave Systems, Railroad Track, Railroad Wharves and Docks, Manufacture of Foundry Equipment, manufacture of Leather and Leather Products, Sawing of dimensional Stock from Logs, Manufacture of Textile Yarns, and the ever-important Cotton Ginning Assets.

 

My personal favorite depreciation category is found on page 105: “Any Horse That Is More Than 12 Years Old At The Time It Is Placed In Service And That Is Neither A Race Horse Nor A Horse Described In Class 0.1222.” Got that?

There are special tax breaks for the oil and gas industry.  Surely you have heard of them before.   One of the breaks was enacted in 2004 to encourage companies to manufacture in the U.S.  That break lets most companies deduct 9% of profits from domestic manufacturing.   Oil and gas companies were classified as manufacturers, but their deduction was capped at 6%.  [1]  President Obama’s 2009 Stimulus package included an accelerated depreciation tax break for corporate jets on the theory it would encourage corporations to buy more jets, employing more Americans . [2]  President Obama often talks as if the accelerated depreciation for aviation and oil & gas drilling were the only tax breaks in the tax code. 

The oil and gas industry breaks are surely there, but ethanol, solar and wind actually enjoy far more favorable tax treatment.  Anyone looking at this IRS Publication 946 will see how disingenuous it is for politicians to focus on oil when almost every industry seems to have its hand in the till, even highly profitable areas like computers. 

Without question, an awful lot of time goes into interpreting and complying with the tax code.  Corporations and interest groups lobby for their narrow interests within the tax code. 

How do we fix this?  A flatter, simpler tax code with universal rules and few, if any, special deductions would be a place to start.  Ask everyone to give up their favorite tax breaks and we will all be better off; call it mutual tax break disarmament.  The US corporate tax rate in the highest amongst developed nations; why would we not want to lower the rates, drop the loopholes and end up with the same amount of revenue but with a lot less work? While there are some issues with Herman Cain’s proposed “9-9-9 plan”, it is a bold attempt to throw out the old tax code and start afresh.  Ideas like that would help get rid of monstrosities like IRS Publication 946.

[1] http://www.usatoday.com/money/industries/energy/2011-05-12-oil-industry-tax-breaks_n.htm

[2] http://www.foxnews.com/politics/2009/02/18/stimulus-includes-tax-break-promote-private-jet-sales/

Pictures from Wikipedia Commons.  IRS html from IRS link above.

As always comments are welcome.  Love the Tax Code?  Hate it?  Feel free to share below.

Astronomical Job Growth in Houston, Texas

In Houston, Job Creation, Oil, Texas on October 6, 2011 at 12:57 am

We saw in https://econscius.wordpress.com/2011/09/03/stellar-texas-job-growth-in-above-average-wage-cities/ the majority (509,560, or 59%) of the 860,740 net new jobs created in Texas in 2001-10 occurred in three metropolitan areas, each of which has enjoys wages above national averages.

After we looked at metro Austin in detail, [1] today we drill into metro Houston (pardon the pun).

The Houston-Sugarland-Baytown MSA, which also includes Galveston and Brazoria Counties, had 5,946,800 residents in the 2010 Census, up 1,231,393 (26%) from 2000. [2]   Metro Houston’s  job growth of 274,510 in 2001-10 accounted for 32% of all Texas job growth. [3]  The rest of the USA actually had negative job growth during the same time frame. 

The Houston-Sugarland-Baytown MSA job growth was in the following US Bureau of Labor Statistics categories:  Business & Financial (+26,870 jobs, average wage $71,190), Sales & Related (+42,080, average wage $38,680), Food Preparation (+50,270, average wage $19,900), Healthcare Practitioners (+37,070, average wage $72,330), Healthcare Support(+21,350, average wage $), Education & Training (+35,600, average wage $51,450), Production Occupations, which includes oil refining (+22,430, average wage $28,671) and all other groupings combined (+38,840 jobs). [3]  This shows most of the job growth was in white-collar jobs. 

Houston MSA Job Growth; Source: BLS data, 2001 vs. 2010

The proverbial “burger flipper” jobs of the Food Preparation category accounted for only 18% of the total job growth, are often held by teenagers, and such growth is to be expected when the metro area had 26% population growth in the decade.  As a proportion of job force, Houston’s Food Preparation category grew from 7% to 8% of the total, which shows the off the cuff claim that “all” the job growth is in “fast food” is incorrect.  By comparison, BLS data shows the USA actually had 9%, a slightly higher percentage of jobs in the Food Preparation category, indicating Houston jobs are less fast-food dependent than jobs are nationally.

Source: 2010 BLS data, http://www.bls.gov

The Houston MSA vs. USA average wages graph below is quite interesting.  It certainly discredits the claims Texas jobs are low wage.  Houston had the greatest absolute job growth of any Texas metro area, accounting for almost a third of the entire Texas total.  As you can see in the graph, Houston wages are competitive with USA averages in all categories. 

One difference shows is how Houston’s skilled professions (management, architecture & engineering, computer and mathematical and healthcare professions are all above US averages, some by wide margins.  The engineering category benefits from Houston’s concentration of well-paid engineers.  The 10,350 petroleum engineers earn a remarkable average of $135,270.  My speculation on why Managers are so well paid would be Houston’s disproportionately large concentration of corporate HQs, meaning the metro area has an unusually large proportion of highly compensated top corporate managers.

On the other hand, a few categories of workers at lower skill levels (Food Preparation, Protective Service and Healthcare Support) earn slightly less than US averages, despite the overall higher Houston wages.  This may reflect the weakness of unions in Houston vis-a-vis the nation at large.  Interestingly, we saw a very similar wage pattern in Austin with the highest skilled workers earning more than national averages and low skilled workers slightly below national averages.

Source: BLS, 2010 data

Houston’s job distribution is quite similar to US averages.   One difference is how the high-wage Architecture & Engineering category is 3.2% of Houston employment, compared to 1.8% nationally.   Another anomaly is the US Healthcare Practitioners & Support categories total 8.9% of workers, but these categories account for 7.6% of Houston workers.  The probable explanation is the younger average age of metro Houston residents meaning they are healthier and less needing of health care.

Source: BLS DataSource: 2010 BLS DataSource: 2010 BLS data

 

Houston has one university in the US News Top 100.  Rice University is ranked #17 [4], which puts it ahead of acclaimed universities like California-Berkeley, Michigan, NYU and Notre Dame.  Other major schools include the University of Houston and the University of Texas maintains a medical center in Houston.  Texas A&M is ranked#58 [5] and is located in College Station, TX, which is 95 miles northwest of downtown Houston.

The 29.7% of metro Houston residents with a college degree matches the US average and exceeds the Texas average of 25.5%.  Interestingly, Houston’s college graduates are more likely to hold a degree in science, engineering and related fields, at 47.4% vs. 43.6% nationally. [6]

What drives the Houston economy?  Energy, both oil and natural gas.  We often hear Houston has grown the way it has “because of oil”.  While oil is extremely important to the Houston story, Houston’s success comes from more than just drilling and refining.  Oil is found in many other places, such as California, Alaska, Pennsylvania, Louisiana, and Oklahoma. 

 Today, Houston is the undisputed capital of the energy industry, but that was not always the case nor was it inevitable.  “In 1960, Houston served as home for only one of the nation’s large energy firms, ranking well behind New York City, Los Angeles and even Tulsa.  Today Houston has 16, which is more than all the other cities combined.”  [7]

ConocoPhillips Logo.svg

Many major energy and related services companies relocated to Houston.  Oil services company Schlumberger relocated its U.S. corporate HQ from New York in 2006.  The corporate HQ of Heartland Oil and Gas moved from Denver in 2007.  CITGO Petroleum switched its HQ from Tulsa to Houston in 2004.   Direct Energy, the Toronto-based electricity provider moved its U.S. head office from Stamford, CT in 2007.  When Houston-based Conoco and Oklahoma-based Phillips Petroleum merged, the new company chose Houston for its HQ.  All of these companies have research & development operations in the Houston area.  Vestas Wind Systems chose Houston for a new US R&D center. [8]  Oil services company FMC Technology relocated from Chicago in 2003. [9]  

Shell logo.svg

Major international energy companies like Shell Oil Company (HQ of the US subsidiary) and BP America moved to Houston.  Pennzoil, now owned by Shell, started in California and had relocated to Houston in the 1970s. [10] BP America relocated its headquarters and some 3,000 employees from metro Chicago in 2008.  [11]  BP again centralized more R&D and even moved jobs from its British HQ in 2010. [12]  BP’s North American operations came from British Petroleum’s purchase of California-based ARCO, Chicago-based AMOCO and Cleveland-based Standard Oil of Ohio. 

Why Houston?  It is not just oil –  presumably, other factors must have made Texas favorable for energy companies.  These factors most likely include low costs of doing business, low taxes, infrastructure, and an educated workforce for the various R&D and corporate HQ staffs.  Eventually Houston attracted enough energy companies to enjoy the benefits of industry concentration. 

Metro Houston has 10,380 petroleum engineers (37% of the entire USA total) with an average wage of $135,270 (higher than the US average $127,970).  There are 9,730 oil and gas derrick, rotary drill & service unit operators (13% of USA total) and they work at slightly above average US wages.  Sixteen percent of the nation’s petroleum pump operators work in Houston at an average wage of $58,540. [3]  If you were a new entrant into the energy business today, your company would probably be very attracted to Houston because the concentration of other energy companies there means a deep talent pool of industry workers.  Houston’s economy includes upstream energy processing such as refineries and chemical companies.

This concentration effect has occurred in other places, such as Detroit with the emerging automotive industry in the 1910s and more recently, Silicon Valley for technology start-ups.   The energy concentration is both an advantage and potential disadvantage for Houston.  Houston has developed some major non-energy businesses, including large computer maker Compaq, which was acquired by HP but still employs 9,000 in Houston (see chart below).  Waste Management relocated from Chicago in 1998 but Houston lost the Continental HQ to Chicago when the airline was acquired by United Airlines in 2011.

Waste Management Logo.svg

How much of the Houston economy is related to energy?  The answer is about half.  The non-energy proportion of the Houston economy decreased from 52.2% in 2001 to 50.3% in 2010 as oil prices surged and companies like BP and CITGO relocated to Houston.  Both figures are better than 1996’s  44.5%. [13]

The Houston MSA area is 38% Latino, 16% Black and 7% Asian [14], compared to the US average of 16% Latino, 13% Black, and 5% Asian. [15]  Thus, non-Hispanic whites are a minority in metro Houston and the city has a much larger minority population than the US average.  Given the lower average educational and income attainment of racial minority groups, it is quite impressive metro Houston is above the US average in income and at the US average for percentage of residents with a college degree.

 
 
Summing up, I find the 2001-10 job growth in Houston to be very impressive, especially when compared to the negative job growth in the rest of the USA in the same 2001-10 timeframe.  The data prove Houston’s wages are above US averages, though there is a skewed effect of the highest skilled workers earning a significant premium to highly skilled workers elsewhere, which presumably reflects the concentration of corporate executives and highly skilled engineers.  On the other end of the spectrum, some low skill worker classifications are slightly below the US averages, quite likely the result of the lack of unions in metro Houston.  The Houston distribution of jobs by type quite closely mirrors that of the US at large, with the largest differences in healthcare as the young Houston population is healthier and in engineering, where Houston is almost twice the national average.   
 
The job growth was across-the-board and not disproportionately in low-wage categories.  In fact, the majority of the job growth was in white collar areas; we even saw how a smaller proportion of Houston workers are in Food Preparation than is the case nationwide.  Houston has an unusually large minority population, which includes an estimated 150,000 or more former residents of New Orleans who were displaced by Hurricane Katrina.  Above all, Houston has a large Hispanic/Tejano population.  Given the lower average wages of racial minorities nationwide, the higher than average wages in Houston show the metro area has done well by most of its residents, including the 54% of the metro area’s population that is Black or Hispanic.
 
Houston is concentrated in the oil industry.  Its success cannot be solely attributed to higher oil prices as nearly the entire American energy industry has slowly but surely been relocating its HQs and R&D groups to Houston.  Higher oil prices had nothing to do with major oil companies leaving Chicago, California, New York, Denver and Oklahoma for Houston.  The open questions on Houston’s future job growth are how well the city will perform if oil and gas prices decline, how much more will it diversify into other non-energy industries, and to what extent will alternative industry players locate in Houston (like Vestas Wind’s R&D group)?  These answers will help determine if Houston continues its astronomical job growth in future decades.
 
We finish with the chart below, showing the largest employers in metro Houston.  The biggest for-profit employers are primarily energy companies like ExxonMobil, Shell, National Oilwell Varco, Chevron, BP, KBR, Baker Hughes, Anadarko and Halliburton but the list also including major non-energy firms UnitedContinental, Kroger, HP (formerly Compaq), and ARAMARK.  Large non-energy firms on the list and headquartered in Houston include Sysco, BMC Software, restaurant chain owner Pappas and Service Corp., the largest operator of funeral homes.
 
Sysco late 2008 logo.png
 
  Metro Houston Employers With More Than 1,000 Employees
1 Houston Independent School District            25,514
2 City of Houston            21,588
3 Memorial Hermann Healthcare System            19,500
4 University of Texas M.D. Anderson Cancer Center            18,599
5 United Continental Holdings            16,000
6 Harris County            14,983
7 The Methodist Hospital System            13,000
8 ExxonMobil            13,000
9 Shell Oil Company            13,000
10 Kroger Company            12,000
11 National Oilwell Varco            10,000
12 The Methodist Hospital*              9,991
13 UTMB-Glaveston Health              9,318
14 Baylor College of Medicine              9,232
15 HP              9,000
16 Cypress-Fairbanks Independent School District              8,917
17 ARAMARK Corp.              8,500
18 Houston Community College              8,098
19 Chevron              8,000
20 Pappas Restaurants              8,000
21 HCA, Inc.              7,855
22 Pasadena ISD              7,447
23 BP America, Inc.              7,387
24 Macy’s              7,000
25 Baker Hughes              7,000
26 AT&T              6,900
27 Katy ISD              6,556
28 Aldine ISD              6,540
29 ExxonMobil Chemical-Baytown              6,500
30 Fort Bend ISD              6,319
31 Dow Chemical              6,100
32 St. Luke’s Episcopal Health System              6,000
33 Texas Childrens Hospital              6,000
34 H-E-B              6,000
35 Halliburton              5,748
36 EPCO, Inc              5,700
36 University of Houston              5,542
37 Fiesta Mart              5,500
38 KBR              5,089
39 LyondellBasell Industries              5,080
40 CenterPoint Energy              5,000
41 Spring Branch Independent School District              4,842
42 UTHealth              4,690
43 ConocoPhillips              4,000
44 Bank of America              3,100
45 Comcast Cable Communications, Inc.              2,700
46 Rice University              2,600
47 Wells Fargo              2,471
48 Amegy Bank              2,215
49 Anadarko Petroleum              2,200
50 El Paso Corporation              2,200
51 Sysco Corporation              1,800
52 Deloitte              1,500
53 The Boeing Company              1,500
54 CITGO Petroleum Corporation              1,367
55 Service Corporation International              1,300
56 Houston Chronicle              1,295
57 BMC Software, Inc.              1,100
58 City of Pasadena              1,088
59 PWC              1,050
60 San Jacinto College District              1,026
61 Oceaneering International, Inc.              1,005
62 Ernst & Young LLP              1,000
63 Accenture              1,000
 

Chart by author, sources: http://www.houston.org/greater-houston-partnership/employers/ and http://hereishouston.com/?q=node/40 and http://www.texastribune.org/library/data/government-employee-salaries/.  This list may not be fully exhaustive, especially of non-public companies.

 

[1] https://econscius.wordpress.com/2011/09/11/stellar-job-growth-in-high-wage-austin-texas/

[2] http://en.wikipedia.org/wiki/List_of_United_States_metropolitan_areas, retrieved 9/29/11.

[3] Houston-Sugarland-Baytown, Brazoria, Galveston-Texas City MSA/PMSA employment and mean wage data retrieved for Total and Occupational categories in 2001 and 2010 from BLS data (2010) http://www.bls.gov/oes/current/oes_26420.htm#00-0000 and (2001) http://www.bls.gov/oes/2001/oes_3360.htm.

[4]http://colleges.usnews.rankingsandreviews.com/best-colleges/rice-university-3604

[5] http://colleges.usnews.rankingsandreviews.com/best-colleges/texas-am-college-station-10366

[6] http://www.houston.org/pdf/research/12AW001.pdf

[7] pg. 61 of http://www.houston.org/economic-development/joel-kotkin/pdf/KotkinReportwithlinks.pdf

[8] http://www.houston.org/pdf/research/16BW010.pdf 

[9] http://www.highbeam.com/doc/1G1-90932695.html and http://www.highbeam.com/doc/1G1-127881332.html 

[10] http://en.wikipedia.org/wiki/Pennzoil, retrieved 9/29/11..

[11] http://www.bizjournals.com/houston/stories/2007/10/15/daily58.html?t=printable and http://www.katyhomefinder.com/blogs/team_dimuria/archive/2008/02/23/bp-relocating-4000-from-chicago-to-houston-3200-request-katy.aspx

[12] http://www.chron.com/business/energy/article/BP-expands-Houston-s-role-centralizes-operations-1695645.php

[13] http://www.houston.org/pdf/research/10FW002-Data.pdf.

[14] http://www.dshs.state.tx.us/chs/popdat/ST2010.shtm

[15] http://en.wikipedia.org/wiki/Demographics_of_the_United_States, retrieved 9/10/11.

Additional background data on Houston comes from http://www.dallasfed.org/research/houston/2005/hb0503.html

Pictures from Wikipedia Commons.

Stellar Texas Job Growth in Above Average Wage Cities

In Job Creation, Oil, Texas on September 3, 2011 at 1:53 am
 

Texas Major MSA Population Growth (Outer Ring) & Job Growth (Inner Ring)

The graph above shows how the Dallas, Houston, San Antonio and Austin metropolitan areas account for the vast majority of Texas population growth and job growth in the past decade.  The entire rest of the state is in the olive shading.  This fact exposes a common and untrue claim about Texas job growth, namely that is is adding a lot of jobs but they are low wage.  Dallas, Houston and Austin all have wage levels that are above both the Texas and US averages.

Average Wages and wage growth 2001-10 are shown in the chart below.  Texas is a little behind the US average but actually made up a little of the gap.  We see the aforementioned average 2010 wages in three of the four big metro areas are above both Texas and US averages.  As we just saw above, the bulk of Texas job creation, 509,560 of 860,740 total new jobs, took place in just those three cities.  San Antonio is not far behind ($39,410 average) and with its low cost of living and absence of state income tax; San Antonio accounted for another 130,940 of the 860,740 total.

US & Texas Average Wages in 2001 plus Wage Growth to 2010

 
How does Texas job growth compare to US job growth?  The next chart shows us how impressive the 860,740 jobs created in Texas was.  The United States total was a loss of <883,250>.  When we remove Texas from the USA total (for statistical purposes, not political secession!), we see the non-Texas US total was really a loss of <1.7> million jobs.  The chart below also shows how geographically diverse the Texas job growth was; all four of the large metropolitan areas as well as the fifth largest city, El Paso and the border cities of Laredo and Brownsville-Harlingen far outpaced overall US job growth.
 
This dispersion of job growth is also found in other, smaller Texas MSAs, too:
 

McAllen-Mission 32%
Victoria 32%
Killeen-Temple 24%
Bryan-College Station 21%
Abilene 15%
Corpus Christi 12%
Waco 5%
Beaumont-Port Arthur 2%
Sherman-Denison -3%
   
Chart by Author  
Source: BLS OES, MSA data 2001 vs. 2010  
 

A criticism of Texas job growth made by Paul Krugman is that Texas is a “still energy-heavy economy”. [2]   Oil and gas are actually a small percentage of Texas jobs, however.  “Mining, which encompasses oil and gas, employs only 2.1 percent of the Texas population – a surprising statistic for those unfamiliar with Texas economics.” [3]  It is true some support jobs, for example teachers and restaurant workers, are indirectly employed by supporting the 2.1% directly involved in mining, but Mr. Krugman overstates the case.  It is also true Texas is not the only state with mineral wealth.  Some states with oil such as California and New York have been less diligent about developing their resources than states like Texas, Louisiana, North Dakota and Pennsylvania have.   This impacts jobs. 

The dispersion of job growth also proves false the claims Texas job growth is all energy.  Houston, Beaumont and Corpus Christi are along the oil intensive Gulf Coast but are not exclusively energy, anyway (e.g. SYSCO Foodservice, headquartered in Houston).  Dallas, Austin and San Antonio have more varied, non-energy economies.  Dallas, the largest metro in Texas, is a major white-collar corporate center.  Austin, home of Dell Computer and many chip companies, is a major technology and Venture Capital hub.   The Rio Valley cities are agricultural centers with strong Mexican border trade.  San Antonio is “Military City USA” with low paid soldiers as well as many white-collar back office functions, logistics, tourism and skilled manufacturing (e.g. new Toyota and Caterpillar plants).

Dallas, Austin and San Antonio certainly help account for the fact education, healthcare and professional and business services, account for 26 percent of all jobs in Texas. [3]  Dallas Federal Reserve Bank CEO Richard Fisher pointed out, “Non-agricultural employment growth in Texas has compounded at an annual rate of 1.95 percent over 21 ½ years; that of California at 0.57 percent and New York at 0.19 percent.” Mr. Fisher noted in the period of June 2009-2011, Texas had accounted for 49.9% of net new jobs created in the United States. [3] 

So where are the low wage Texas jobs some pundits keep talking about?  They are not in the four big metropolitan areas, but instead are found in rural areas and smaller communities, many of which have been poor since before the US annexed Texas.  This is hardly unique, however, as there are poor rural areas and declining small cities in upstate New York, downstate Illinois, interior California, etc.  I am unaware of any state that has solved this disparity.  In fact, other high wage metro areas are not located far from much lower wage, economically depressed cities in their own states, e.g. San Francisco ($59,820 avg. wage) vs. Fresno ($41,100) and Merced ($39,080) or New York City ($55,080) vs. Buffalo ($42,010) and Binghamton ($41,260). 

I think another important point is how the direction of Texas wages is up and has, for decades, been slowly but surely closing in on national averages.  There is something disingenuous about comparing the higher average wage levels in declining northern small cities with traditionally poor, but upcoming Texas cities.  Rochester was the birthplace of Kodak.  Buffalo was a very prosperous port and manufacturing city.  Carrier invented air conditioning in Syracuse.  The somewhat higher residual wages in some of these Rust Belt cities do not go as far due to taxes and living costs and their long term unemployment and wage trends are typically not at all promising.  Would you rather build your future in Buffalo or San Antonio? 

Another factor in Texas wages is the unfortunate fact that racial minority groups are lower-income in America.  Whites are a minority in Texas.  I should emphasize I do not believe there are any innate differences, simply differences in culture, role models, difficulties with English as a second language, etc.  Metro San Antonio is majority Latino.  High wage metro Houston is 41% Latino.  It would appear the Texas economy is doing something right for many Hispanics in these cities.  Many of the below average wage areas in the Rio Valley are almost exclusively Latino, such as Hidalgo County, home of McAllen ($32,470 avg. wage), which is 91% Latino, and Webb County, home of Laredo ($33,580 avg. wage), which is 96% Latino.

In conclusion, the data shows Texas job growth far exceeded the nation in 2001-2010 and the Texas job growth was concentrated in metropolitan areas with above average wages.  This disproves the claims Texas is simply creating low wage jobs.  There are low wage jobs in Texas, many in South Texas agriculture have been there in more or less the same form for centuries, but it takes some clever mental jujitsu to look at the actual record of Texas and not see the huge growth in population and in jobs in above average wage cities. 

Texas Longhorn logo.svg

[1] Data sources: 2001 US and Texas employment data:

http://www.bls.gov/oes/2001/oes_00al.htm and http://www.bls.gov/oes/2001/oes_tx.htm#b00-0000; 2010 US and Texas employment data:  Texas $42,220, US average $44,410

http://www.bls.gov/oes/current/oes_tx.htm#00-0000 and http://www.bls.gov/oes/current/oes_nat.htm#00-0000

 2001 MSA employment data:

http://www.bls.gov/oes/2001/oes_0640.htm#otherlinks, 2010 MSA employment data: http://www.bls.gov/oes/current/oes_32900.htm#00-0000, 2000 & 2010 Census data by MSA: http://en.wikipedia.org/wiki/List_of_United_States_metropolitan_areas and State Census data: http://www.census.gov/popfinder/

[2] http://seattletimes.nwsource.com/html/opinion/2015919308_krugman16.html

[3] http://www.christianpost.com/news/dallas-fed-ceo-defends-texas-job-growth-warns-politicians-over-criticism-of-bernanke-54419/

No Oil “Speculation” When US Crude Is $26.49/bbl. LESS Than European Oil

In Koch Industries, Oil on August 20, 2011 at 11:40 pm

Friday’s crude oil market closing prices prompt a follow-up on my post “Think Again About Oil Speculation” (https://econscius.wordpress.com/2011/07/04/think-again-about-oil-speculation/).  The US crude oil futures price on the NYMEX settled at $82.26 per barrel.  The Brent [Europe] crude oil futures price closed at $108.62/ bbl.  This set a new record differential of $26.49 between the US and European crude oil prices. [1]

In “Think Again About Oil speculation”, I wrote:

“But a question I ask of [ThinkProgress] or anyone who believes there is massive price manipulation in the oil market is this: why is the price per barrel of oil in the US market lower than in Europe?

“The fact is West Texas Intermediate crude (“WTI”) has been running about $15-20 per barrel less than Brent Crude (London).  As of Friday July 1, 2011, WTI crude ended at $95.24/bbl., whereas Brent Crude ended at $111.86.  Do the math and West Texas Intermediate crude was $16.62 (17.5%) lower than Brent Crude.  If the US crude oil price is driven higher by speculation as TP claims, wouldn’t the WTI price be higher? ” 

The new record differential only buttresses my prior argument against claims Koch Industries or anyone else is responsible for a large component of oil prices through “speculation”.  The fact is the US price continues to be much lower than the European price.

The price differential is attributed to a recent supply glut at the big pipeline terminus in Cushing, OK.  That glut is understood to be the result of weak US demand on account of the weaker than expected economy, the oil supply boom in western Canada and US Oil shale, and the lack of any pipelines bringing oil from Cushing, OK to ports for export.  Exporting excess crude oil to Europe would take advantage of the WTI-Brent differential through arbitrage.  The Wall Street Journal today reports of four pipeline plans to do just that: bring crude oil from Oklahoma to Gulf ports.  None of the four is Koch Pipeline LP, either [1]. 

Building new pipelines seems like an awfully expensive fuss for oil companies to try to raise the price of US crude if left-wing opinion writers are correct that all it takes is a little behind the scenes, highly profitable “price manipulation”.  Why bother with expensive new pipelines?

[1] http://online.wsj.com/article/SB10001424053111903596904576518703383403950.html?KEYWORDS=a+rush+to+pipe+oil

Picture from Wikipedia Commons.

Think Again about Koch, Soros and Crude Oil Prices

In Koch Industries, Oil on July 5, 2011 at 4:53 am

Lee Fang of ThinkProgress (“TP”) makes additional claims about Koch Industries and oil speculation [1].  Before we look at his specific charges, let us step back and assume most normal people have never heard of Koch Industries.

Charles and David Koch are the primary owners of Koch Industries, one of America’s most successful private companies.  A number of left-wing interest groups and websites such as TP are very focused on Koch Industries because the Koch brothers are philanthropists who contribute to conservative interest groups.   The Koch brothers have been hiding in plain sight for decades (e.g. David Koch ran as the Libertarian Vice Presidential nominee in 1980), but the fact the Koch brothers backed the Tea Party group Americans For Prosperity seemed to have set off a liberal media storm with an August 30, 2010 New Yorker article by Jane Mayer reporting on the Koch brothers’ political giving.

Despite the breathless tsk, tsk tone some of these liberal groups use about the Koch brothers, there is nothing remotely wrong with funding political advocacy groups.  It is a legal use of free speech.  Many liberal groups are funded, for example, by the billionaire speculator George Soros [2].

In fact, Soros is a financial backer of, drumroll please, ThinkProgress and its parent, the Center For American Progress [3] [4].   “Billionaire investor George Soros bought an $811 million stake in Petroleo Brasileiro (Petrobras)” and bought into Canadian oil firm Talisman Energy [5].  There is nothing wrong with these purchases, though it is interesting TP’s backer Soros happened to be making huge investments in oil companies in 2008.

Koch Industries has a number of businesses, including a pipeline company and six refineries at its Flint Hills Resources subsidiary.  Koch is not involved in oil exploration or production (“E&P”) [6].  

Because Koch Industries is a private firm, we do not know how big its Flint Hills refinery subsidiary is. Wikipedia has Koch at $100 billion total revenues. Koch owns Georgia-Pacific Paper, which was $20 billion when GP was last a public company in 2004.  Koch also owns ranches, a pipeline company, a major fertilizer company, and a chemical maker that makes Stainmaster carpets.   We cannot say with any confidence just how big Flint Hills is, but I will take a guesstimate of an average refinery size by dividing the $82.2 Billion 2010 revenues of Valero, the nation’s largest refiner, by Valero’s 15 refineries [7].  This implies Flint Hills may be somewhere in the neighborhood of $30 billion of revenues, which also seems ballpark accurate as a plausible place for Flint Hills within the $100 billion Koch Industries.

Oil refining is a high volume, low margin business.  Valero reports a cost of sales in excess of 90% of revenues [8], meaning Flint Hills is likely purchasing $20 Billion or more of crude oil per year.

Oil refiners make their money from the difference, after costs of refining, between the wholesale price they get for their refined oil products and the price they paid for crude oil.  E&P companies drill for oil and sell crude oil to refiners.  Refiners then sell refined products like gasoline to retail gas station companies (“oil marketing”) and the other products like kerosene or aviation fuel to other users.   There are actually two groupings of US futures markets for oil: crude oil (primarily West Texas Intermediate (“WTI”) Crude) and finished product markets (heating oil, kerosene, aviation fuel, diesel, and refined WTI gasoline) [9].

The implication to the facts above is Koch’s Flint Hills Resources has an interest in a LOWER crude oil price.  If Koch were to try to ‘manipulate’ markets, wouldn’t it presumably be to lower the WTI crude price?  TP does not understand this.  

TP’s article says an attorney at Koch’s law firm replied to TP’s ‘investigation’ by “claiming that Koch is solely a bonafide [sic] hedger, meaning that it only participates in speculative markets to reduce risk for the oil the company refines”.  TP, of course, dismisses that out of hand.  Hedging is a legitimate and common business tool used in various industries.  A refiner like Koch might purchase crude oil futures in the market to lock in today’s price and also sell futures for the refined products like gasoline and kerosene; locking the two prices removes the risk of  short-term moves in the price of oil. 

TP shows its so-called proof of Koch raising prices as Koch leasing “four supertankers to hold oil in the U.S. Gulf Coast to take advantage of rising prices in the months ahead.”  TP cites a Koch executive as saying  “The drop in crude oil prices from more than US$145 per barrel in July 2008 to less than US$35 per barrel in December 2008 has presented opportunities for companies such as ours.”  [10]  All this shows is that Koch was helping smooth out prices.  With the worldwide financial and economic collapse in late 2008, the anticipated future demand for oil plummeted, driving down prices.  Furthermore, the US dollar strengthened as a safe haven, also driving down the dollar price of oil.  Koch apparently took advantage of the price collapse and bought crude oil at about $35 per barrel.  While that would have a small marginal impact of raising crude oil prices in late 2008, TP is forgetting that the crude oil must later be used by Flint Hills or be sold back into the open crude oil market, having the exact opposite impact: lowering the price of oil.  It actually is advantageous to US consumers if the price of oil went up some tiny amount in December 2008 when the price cratered and then the consumer enjoyed the mirror image impact of a tiny amount of price reduction later when oil prices have recovered. 

Given that Flint Hills is a refiner purchasing perhaps $20 billion or more of crude oil each year, Koch Industries has an interest is in a lower price of crude oil.  It is quite possible Koch may, at an unusual time such as December 2008, stock up on crude oil when its expertise lead the company to think it is an artificially low price.  But the impact canceled out over time when Koch used or sold that oil back into the market in 2009 or 2010.  We also know the Koch brothers are libertarian in outlook and have been involved in political giving for decades.  There is nothing scandalous about the Koch brothers giving to conservative and libertarian causes.  The fact the Koch brothers supported deregulation proves nothing about oil ‘speculation’.  Lots of people have opinions one way or the other.  For example, George Soros is a famous speculator, who was investing in oil production companies in 2008.  Soros is a backer of TP and liberal causes, which may explain why TP does not attack Soros for investing in oil companies in 2008.   The TP ‘report’ about Koch and oil speculation is much ado about nothing.  I have probably given TP far more attention than it merits, but the TP articles are Facebook “liked” by thousands, suggesting an unwarranted following.  I hope TP readers will think twice about its wild claims.

[1] http://thinkprogress.org/report/koch-oil-speculation/

[2] http://en.wikipedia.org/wiki/George_Soros accessed 7/4/11

[3] http://www.nytimes.com/2008/11/07/us/politics/07podesta.html?_r=1&ref=politics

[4] http://en.wikipedia.org/wiki/ThinkProgress accessed 7/4/11

[5] http://gulfnews.com/business/oil-gas/soros-hedge-fund-invests-811m-to-buy-petrobras-stake-1.125134

[6]  http://en.wikipedia.org/wiki/Flint_Hills_Resources accessed 7/4/11

[7] pgs. 3 & 4 of http://media.valero.com/flash/AnnualReport2010/pdf/report.pdf  Valero sold the 15th refinery at year end (pg. 6).  Both Valero and Flint Hills are in ethanol refining.

[8] pg. 4 of http://www.valero.com/InvestorRelations/FinancialReports_Filings_Statements/Documents/VEC%201Q%202011%20Form%2010-Q%20Final.pdf

[9] https://www.theice.com/productguide/ProductGroupHierarchy.shtml?groupDetail&group.groupId=18

[10] http://thinkprogress.org/economy/2011/04/13/153206/koch-industries-price-gouging/

Think Again About Oil Speculation

In Koch Industries, Oil on July 4, 2011 at 5:17 am

The widely read left-wing blog ThinkProgress (“TP”) makes several claims about US oil prices in a pair of companion articles about oil speculation.   TP claims “a true driver of high prices: oil speculation” and that its own investigation revealed Koch Industries “is perhaps the most important player in distorting oil markets for private profit”. (http://thinkprogress.org/green/2011/06/06/237542/koch-oil-speculation/)

Unlike TP, I thought the key drivers were supply- including the distortions of the OPEC cartel- and demand- increasingly fueled by tens of millions of new automobiles in developing nations like China, Brazil, India and Turkey.  In two posts, I will analyze TP’s serious charges for you.

Today, let’s look at TP’s first post by Lee Fang, which purports to prove oil ‘speculation’ is adding a huge premium to the price.  The charge is an explosive answer to the controversial question what, if any, impact oil futures trading has on oil prices.  

TP says, “Experts contacted by ThinkProgress pin the blame for sky-high prices and record volatility on excessive oil speculation.”  Unfortunately, these “experts” are anonymous.  We have no clue who TP’s “experts” are and what credibility, if any, they have.   The one named source TP uses is Goldman Sachs, claiming “even Goldman Sachs concedes that at least $27 of the price of crude this year has been a result of rampant speculation, not supply and demand.”  That is a tremendously large number- a quarter of the total price!

I found a terrific piece in PowerLine which ably traces back TP’s links and dissects the “Goldman” report about a $27 speculation premium.  I will not reprint it at length but the PowerLine piece shows there is no such Goldman report and no basis for the $27 figure (see http://www.powerlineblog.com/archives/2011/06/029194.php).  Thus, we must dismiss TP’s claim about a non-existent Goldman report.

TP then doubles down on the $27 number and says “Other experts contacted by ThinkProgress have said the number is closer to fifty dollars.”  Again, TP uses unnamed “experts” to support this extraordinary claim that half of the price per barrel of oil is pure speculation.  Without TP naming any names when making such a remarkable assertion, the claims lack credibility. 

But a question I ask of TP or anyone who believes there is massive price manipulation in the oil market is this: why is the price per barrel of oil in the US market lower than in Europe?

The fact is West Texas Intermediate crude (“WTI”) has been running about $15-20 per barrel less than Brent Crude (London).  As of Friday July 1, 2011, WTI crude ended at $95.24/bbl., whereas Brent Crude ended at $111.86.  (http://www.bloomberg.com/markets/commodities/futures/)

Do the math and West Texas Intermediate crude was $16.62 (17.5%) lower than Brent Crude.

If the US crude oil price is driven higher by speculation as TP claims, wouldn’t the WTI price be higher?  

Why is the European price higher?  Are the mysterious oil speculators (Koch?) also involved in Europe and involved in an even bigger, even more mysterious plot to drive the European price so much higher than what they supposedly also did to the US price?

Wouldn’t the Europeans be far less likely to be victimized by an oil speculation conspiracy than the supposedly under-regulated Americans? 

If you believe in TP’ $27/bbl. or $50/bbl. ‘speculation’ premiums on the price of oil in the United States, logically, you must think Brent Crude is subject to an even more massive ‘speculation premium’ of $44/bbl. ($27 speculation in the US price plus $17 higher price in Europe) or the even more fanciful $67 ‘premium’ if you believe TP’s unnamed ‘experts’.  

In thinking about the price of oil, I understand people being concerned about movements in the price.  It is frustrating for consumers to see the price at the pump go up because of events from afar- such as a civil war in Libya which disrupts supplies.  But the TP article sheds no light when citing a non-existent Goldman Sachs figure and anonymous “experts”.  My question of why European oil is more costly flies in the face of a massive US ‘speculation premium’. 

Tomorrow: we explore TP’s companion ‘report’ that specifically fingers Koch Industries as the builders of an empire of oil speculation.  You may have never heard of Koch Industries before, but I promise you will know more after reading my next post.