econscius

Posts Tagged ‘ThinkProgress’

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.

Blaming Bachmann for the Wrong Thing

In 2012 Elections, Michele Bachmann on July 6, 2011 at 3:42 am

A ThinkProgress (“TP”) piece called “Bachmann Fails Economics 101: A Dollar In 2011 Should Be The Same As A Dollar In 1911” launches a hit on Republican Presidential candidate Michele Bachmann.

TP says Bachmann “made a series of laughably uninformed economic claims:”

“BACHMANN: The shorthand way of describing to you what quantitative easing is is a license to print money without any value behind it…In the last two years of the Obama administration, if you pull a dollar out of your pocket, you have lost 14 percent of the value of that dollar. That means the federal government has stolen that money from you… They’ve been printing essentially valueless money and flooding it into the money supply. I don’t stand for that. A dollar in 2011 should be the same as a dollar in 1911. A dollar should be worth a dollar.”

TP’s Marie Diamond follows, “A dollar in 1911 had the same buying power as slightly more than $23 today.  Bachmann doesn’t seem to understand that the dollar’s value naturally changes over time and accompanies economic growth — and that’s a good thing.”

Not quite.  Inflation is not necessarily a good thing.  Just ask anyone who lived through 1970s America or 1920s Weimar Germany.  A seriously debased currency is a hallmark of poorly governed nations.

No less a master of Economics 101 than the Nobel Prize winning economist Milton Friedman and his wife, the economist Anna Schwartz, argued in their classic work  A Monetary History of the United States, 1867-1960, “inflation is always and everywhere a monetary phenomenon” [2]. 

US Inflation from 1913. Source: wikipedia commons http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg

The United States has experienced solid economic growth with low to non-existent inflation in times such as in the 1920s.  We have also experienced high inflation during times of economic stagnation and decline such as in the late 1970s/early 1980s.  High inflation has been associated with the aftermath of costly wars (e.g. American Revolution, Civil War, WWI, WWII & Vietnam).  There is no question, for example, the Continental Congress did use the printing press to fund the Revolution.  Continental Dollars quickly became worthless.  The weakness of the US Dollar after wars like Vietnam was hardly “natural”.  Ms. Bachmann may be a bit early in diagnosing runaway inflation though it is always a threat during times of monetary easing and fiscal stimulus. 

US Historic Inflation. Source: wikipedia commons http://en.wikipedia.org/wiki/File:US_Historical_Inflation.svg

Certainly the gist of Bachmann’s point, that inflation is a silent thief that constantly erodes the value of your money, is correct.  A century of zero percent inflation is probably unrealistic, but TP is off-base in saying the huge cumulative decline in the value of the dollar since 1911 is “a good thing”.

Ironically, with TP trying to attack Bachmann on inflation, Ms. Diamond missed the obvious factual error in Bachmann’s statement.  Bachmann said inflation has reduced the value of a dollar by 14 cents in the past two years of Obama.  The BLS unadjusted CPI rose 2.9% in 2009, 1.9% in 2010 and is up 1.7% in the first five months of 2011. [3] [4] [5]  I cannot even see where Bachmann came up with the 14% figure. 

Bachmann made a factual misstatement, but not the one TP accused her of.

[1] http://thinkprogress.org/economy/2011/07/01/259149/bachmann-fails-economics-gold-dollar-1911/

[2] http://en.wikipedia.org/wiki/Monetarism accessed 7/5/11.

[3] pg. 3 of http://www.bls.gov/cpi/cpid1012.pdf

[4] pg. 3 of http://www.bls.gov/cpi/cpid1012.pdf 

[5] pg. 3 of http://www.bls.gov/cpi/cpid1105.pdf

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/