Tag Archives: Oil prices

The math is off

That was the very first thought I had when I looked at an article in the New York times by Clifford Krauss from September 1st 2015 (at http://www.nytimes.com/interactive/2015/business/energy-environment/oil-prices.html). You see, the article is quite good and very descriptive, so why is it wrong? Is it his math? Are they the facts? First when we look at the title ‘Oil Prices: What’s Behind the Plunge? Simple Economics‘, now I am all for simple economics, I have wielded that bat myself on more than one occasion, still something is off (not just the smell of oil), so let’s take a walk in the proverbial path of black gold.

  1. Oil is finite. Oil does not regenerate and when it is gone, it is gone forever. In addition, most elements that come from oil have a very short lifespan. Add a match and the stuff just instantly burns away, it burns away leaving you burnt if you stand too close. For a long time our usage grew exponentially, at this point the amount of crude oil used would fill a cube sized at 20 miles by 20 miles by 20 miles, so that is one massive cube! Still, when you consider the oil fields and the size of them, those fields tend to be a lot larger, yet overall they might remain largely below a few hundred metres (which still makes for one massive oilfield).
  2. The quote “United States domestic production has nearly doubled over the last six years, pushing out oil imports that need to find another home. Saudi, Nigerian and Algerian oil that once was sold in the United States is suddenly competing for Asian markets, and the producers are forced to drop prices” is an issue for me. For this we need to look at two additional quotes from the BBC. the first one is “US crude oil was trading at more than $90 a barrel a year ago, but now costs around $45. The UK’s Brent crude has also halved in price from a year ago and is currently trading at about $48 a barrel” as well as “US oil production has increased to a record high in recent years as high prices made investment worthwhile” which was given earlier in that same story (at http://www.bbc.com/news/business-34219144), which is only a few hours old. Now consider one more quote that is only loosely related (one would think). The quote is “Techniques such as fracking have helped US producers offset the falling oil price by lowering investment and production costs“. Now let’s go over the motions (or is that emotions?).
  • When an investment is made, there is a tax write-off, that part has already happened! So those costs are ‘gone’ after that it is the return on investment which takes care of the costs and after that profit comes. This is simple economics. I get an income, I pay for the costs and I pay taxation.

    Now what happens when I work at a loss? This happens. Let’s take the example. I have product X, it makes me a £1000. To get this I need to pay for equipment, which is bought and for the time of the loan this will cost me 300, in addition I need people (you know a non-mechanical labour force). Another 300 gone, leaving me with 400. The evil villain Taxman takes his share and the rest is mine. So let’s say I get to live of the remaining 360. So far it all remains simple. Now we learn that everybody has this setup, so now suddenly people are only willing to pay 500, which is an issue. People get payed, yet I have to share with the loan so I lose out largely, the bank loses out some and Taxman ‘you evil villain!’ you lose out completely (so it’s not all a loss).
    This is how it should be. Now consider the equipment. Either the loan owner (or the investor) takes a dive (for now) as the timeline shifts, so there should not be a massive impact. Not to the degree we see. When you see all these oil articles have you noticed how we see these Jack pumps? We see the iconic devise in nearly every oil mention, so why the pump jack? If that was all it is, a 1925 invention would not be the cause of so much costings.
    This is where the first crumb is left. Those connected state that it is no longer ‘profitable’ to get their money’s worth, which is part of the issue. I personally believe that the players have been engaged in an accountancy game for a very long time. In some cases there are of course long term loans, and yes any device needs maintenance and needs upgrades, yet the Pump Jack could run for almost a decade not getting any attention and the oil flows on. Now, we can agree that oil tends to be found in deeper regions, so the pump jack might not be enough. But the press never shows us that picture do they? Now when it comes to pumps, they need maintenance, sometimes not that much, sometimes the need for mechanics is a lot more pressing. Yet these people are not expensive, so even at $45 a barrel, 20 of them buys an engineer for a day and these places are doing a million barrels a day at times, so the money should remain ‘stellar’.

  • What if this is not just about the price? We know there are much more players in the field, but we all tend to forget that oil was always a finite commodity. It is like living on an island like Crete. Prices there fluctuate (I always loved Crete), but overall living there remains close to the same, even better, selling new houses remain at a reasonable high price. If you wonder how correct (or how wrong I am). Take for example the Bermuda’s an island near you. When you look over a longer timeframe, you will see that these places fluctuate like most places, but never to the extent the average price seem to fluctuate on main land. Take Hawaii, everyone is trying to own something there making prices spike. Now consider the fluctuations and how massive they are for oil. Here my first doubt grew. Yes, we all know that cars are more efficient, we know that spending is down, we know all that yet the overwhelming majority of the people need to get to work by car, by bus or by train. All of them require fuel, even the electricity made comes from power plants and not all of them are nuclear or coal based. Which gets us to bullet point point c.
  • other uses. For this we need to look at the Washington post (at http://www.washingtonpost.com/graphics/national/power-plants/), where we see that there is still a massive group of power plants fuelled by oil. Now, the fact that these are phasing out, because of pollution is a good thing, a great thing even, but for now many are not. In case of Hawaii, where 71% of electricity comes from oil run power plants, the statement from UHERO struck another issue. The Economic Research Organisation at the University of Hawaii stated at (http://www.uhero.hawaii.edu/news/view/273) “Electricity prices can be roughly boiled down to the price of oil, which is used to generate most of our electricity, plus price we pay for fixed costs like power plants, the grid and its management. These costs are fixed in the sense that they don’t vary with the amount of electricity generated and consumed. We have record high electricity prices because oil prices remain high“. Even though the page is from 2014, the collapse of the oil price should have been seen on many levels in Hawaii, but it is not (as far as I can tell), so why are prices pushed upwards and is the collapsed oil price is seen as an ‘evil’?
    In my view this is all about the way the books have been kept from the very beginning. Whether I rely on some knowledge I gained from Schlumberger when I worked there in the past. Whether I go from some news article and some academic papers, my view remains largely the same, the numbers do not add up, they never did but until the oil price collapsed no one had a clue how far they were out of touch.

And now we get the final part in this. Another article by the New York Times. This one is also from Clifford Krauss and it was given light on August 19th 2015. The title ‘Oil Companies Sit on Hands at Auction for Leases‘ is part of what I think is only one facet in the entire debacle. The leases are worth gold and if the numbers as stated go on, than the leases are not kept. So is this to frighten the actual owners of the land to sell cheap? How many leases are up for renewal in the next 2 -3 years? More important, what if the owners state that non-renewal opts for other requirements? The quote “the fortunes of oil companies are skidding so fast that they now need to cut back on plans for production well into the future“, Now we add one more fact from Europe. Scottish energy news reported (actual date unknown) “After nearly 40 years of production, the Brent oilfield – which gave its name to the North Sea benchmark – is now mostly empty“. It is not the only one, not the first and most certainly not the last. We can state that no matter how ‘complex’ the decommissioning is, that this is one of the smaller fields (globally speaking). Even as it was only 10% of the UK oil production, an island with a mere 68 million consumers, the field is dry. So what about the other fields? Is this truly just about leases and demand dropping, or is this to maximise accountancy?

I prefer and I am largely wrong here in this instance, but consider the elements I mentioned up to now. I feel that I am correct ‘the numbers do not add up’, I just do not know why, because it is not simple economics. If that were try then the investments would have been paid off, the maintenance of rigs would remain, but the investment dollars would have been a massive ROI many years ago. So as we consider the image of ‘Oil pumping jacks and drilling pads at the Kern River Oil Field in Bakersfield, Calif‘ from the second Krauss article, we must wonder what the article (at http://www.nytimes.com/2015/08/20/business/oil-drillers-sit-on-hands-at-auction-for-leases.html) the quote “The continuing drop in oil prices and low natural gas prices obviously affect industry’s short-term investment decisions, but the gulf’s long-term value to the nation remains high“. Is that so, in my view, thee quote that directly follows “Offshore drilling, particularly in deep waters, is some of the most expensive exploration done by oil companies around the world. Nevertheless, since the 2010 BP Deepwater Horizon disaster that left 11 workers dead and soiled hundreds of miles of beaches, and the one-year drilling moratorium that followed, production in the gulf has flourished“. So even with the dangers to the environment, the mistakes made and the fact that there is such a surplus to it all deep water drilling, the fact that the investment is massively higher from other options, that part continues?

Is that not the big weird?

If there is so much space to work, why set up your fashion store in a nuclear reactor? Because it amounts to the same thing. You go where you can make your fortune in as comfortable a setting, with the lowest risk and the best returns. That part is a given, has been for decades. Only the accountants have a different view where the taxed benefit of having to buy radiation suits overrules the need for clean profit.

The numbers have not been adding up and only recently with the unusual drop in prices do we seem to wonder why.

The final quote to look at is “That surge will partly offset an expected decline in onshore production because oil companies have reduced their rig count on land by more than 60 percent since last year“. Why? if it is running, as the oil is coming up, it is just going on nodding like a horse’s head, filling up barrel by barrel as the mechanic sleeps until one stops working. You only decrease to this amount when the returns, the actual amount pumped starts to lower by too much.

Make the looks for yourself, try to do the math, it does not add up. In my view whatever formula you get given from anyone you must question (even those from me). The article gives a surplus of two million barrels a day from Iraq and Saudi Arabia, yet the processed goods keep on rising in price. What are we not being told? What are we not seeing?

I’ll let you decide on that part.

 

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Finding inspiration

The act to incite, perhaps even a form of stimulus. Yet, when we go back to a more theological page we see: ‘a divine influence directly and immediately exerted upon the mind or soul‘. So what is wrong with inspiration? You see whilst inciting could be seen to encourage a positive term, incitement is for the most ALWAYS negative. When we see incitement we see: ‘the action of provoking unlawful behaviour or urging someone to behave unlawfully‘, why not see incitement an act as to encourage positive change? Even stimulus is now nearly always seen as a negative. The stimulus package being a foremost example.

In an age where hardship rules, we could use a positive force, yet when we see that projection of feigned wellness is combined with managed bad news, what positive force could be atoned? This is the thought that has been in the back of my mind as I am completing my current assignment. A choice I made in the past, whenever I get one step forward, the next instance I am facing two steps back. This is perhaps just a situation that exists between my two ears (as we refer to mental issues).

Greece is not even the foremost example on my mind. There are other issues where we see a change on what is for some and will never be for most. The next part seems a little repetitive as I have mentioned these parts in the past.

  1. How is it possible?

Here we see a side of the world that seems out of context as per last year. Forever the oil prices were going up and up until it went beyond $120. Profits were astronomical. Now, as prices are just below the lowest basement, we see the following parts (at http://www.theguardian.com/business/2015/apr/26/bp-profits-down-still-in-deep-water). “It’s a big week for big oil, with both BP and Royal Dutch Shell reporting results. Despite crude prices hitting a 2015 high at the end of last week, they are still almost 50% down since last June, which means continuing trouble for the businesses“. Now consider the reality. Take a litre of crude oil, ½ becomes Petrol, one third becomes Kerosene and the rest goes into dozens of other products. Now consider the history of your shopping. Since 2008 (and since the oil drop of 2014), when did your petrol price go down and by how much? Jet fuel should go down, yet Virgin, Qantas and others are keeping the Jet fuel surcharge in place. So at present we have accounted for almost 85% of the crude oil, the rest goes into products like soap, Vaseline and other carbon based artefacts.  None have ever made a decent downgrade in price. However, the article claims on such hardships even though the price of the raw resource is still lower than ever. So what stories are we being told? Are the oil companies guilty of incitement to exploitation?

  1. How are we in this position?

Here are 8 mergers for last year, several more are to come and hundreds more have passed and a fair amount of mergers are set at mega billions, several in the pharmaceutical industries.

Lets take a look at a few of the 2014 mergers: Value: $67.1 billion, May 18, 2014, Value: $46.8 billion, June 15, 2014, Value: $46.8 billion, April 7, 2014, Value: $25.3 billion, February 18, 2014, Value: $23.6 billion, March 11, 2014, Value: $19.4 billion, February 19, 2014, Value: $17.1 billion, April 30, 2014, Value: $16.01 billion, January 13, 2014. Total $262 billion. Now consider that these mergers are for the most tax-free when they are seen “as reorganizations through acquisition. Under this model, companies must swap, rather than outright sell, assets and equity such that the two companies end up becoming one new company with an agglomerated store of assets and equity“, that is very nice for the boards of directors and as multiple borders are broken, many options (highly complex ones) open up to maximise non taxability. Yet, many governments have done next to nothing to curb this form of greedy exploitation at the expense of the local governments whose protection they enjoy and the exploited workers who are left at the short end of the stick in many cases, again and again. There is often little consequence for the acquiring party will soon find themselves in an upward reorganisation, but the other party is more often than not in a less positive position, which is the way of the world, I will not oppose the issue of reorganisation and acquisition, yet the laws have been bend beyond reasonable. In the near past there was a level of equilibrium, as the governments got a slice of that pie. Now, as too many levels of non-taxability are offered, we see a completely unbalanced view of life, to a smaller part in regards to rich industrialists, but to the largest extent to a whole score of enabling politicians with a limited sight to the future whilst blind staring to what was in the past the ‘now’ and never to adjust the future of what should be.

We are all feeling these shortcomings now, Greece a lot more than the others I might add!

Now we get back to Greece for one simple example. The one thing Greece had to do for well over a decade is the step only taken (if we can believe the press) only last week (at http://www.newsweek.com/greece-launches-frantic-crackdown-tax-evaders-ahead-repayments-324927), here we see the story of Leonidas Bobolas, arrested and not to be released until back taxation had been paid. Some might think it is a solution, for me and many others it is a final desperate act by a government that did not take things serious until it was too late. This must be a laughing moment for Kostas Vaxevanis, whose list must be very important at this moment, but there is every chance that the truly big rollers are getting away with it all and more important, the money that will be gotten here is nowhere near the amount required for the payments over the next 16 weeks. It is the final spasm of a nation that has every real danger of becoming extinct a second time. New Greece might soon join Ancient Greece as it becomes forgotten, slowly but surely.

OK, I admit that this future is unrealistic (not to mention vastly exaggerated), but is that not how the Greeks currently feel? A system so broken that the people are suffering. The place where Democracy was born by the mind of Aristotle. It was the foundry where the Olympic Games were devised, yet in all its social paths, the one path forgotten was the safety of the Greek future. Why will this tax evasion path fail? Well, consider that Leonidas Bobolas is ‘regarded’ as one of the large evaders, now consider that his due taxation was less than 2 million Euro and add to this the following quote: “Government data suggested that some €70bn was owed in unpaid tax at the end of 2014. Transparency International found the country’s opaque tax code and corruption of tax collectors meant evasive tax arrangements could be set up for as little as €100“. To get to 70 billion, they would need at least 55,000 tax evaders, all due 1.5 million, now consider the Kostas Vaxevanis list that covered less than 2100 names. The amount due cannot be met, not even close through this way. In addition we see even more posturing of inaction. This comes again from Yanis Varoufakis who stated: “one of the key reforms the government was proposing was the creation of a fully independent tax commission to tackle the problem“. I would personally translate this into a delay of up to 24 months with no actual actions at all. This one arrest is just for show as I see it, a few more will make headlines, but in the end, the funds will not be there on time and we can state that clear evidence of inaction from the Greek government is a mere display of fact.

Why mention Greece?

Greece is at present the extreme example, but not the least of the issues. It shows a governmental failing that is present all over Europe. Greece in its position is only the first one to visibly no longer manage its upcoming bills. The majority of European nations have maintained an inability to manage budgets, which is the second tier in this. As these governments make new mentions of ‘stimulus’ as a solution, it only masks an inability of forward momentum, whilst on the other side of that formula we see governmental spending sprees that cannot be covered in any way, shape or form. One example is the Dutch Stimulus package of 2009, one document (at http://ec.europa.eu/economy_finance/economic_governance/sgp/pdf/20_scps/2009-10/01_programme/nl_2010-01-29_sp_en.pdf) forecasts a GDP growth of 2% in both 2011 and 2012, a number that would never be achieved, in the end, the growth would be -0.2% and -0.6%, the year after that it was -0.8%, we can speculate that without the stimulus it would have been worse, which is a likely result, but the fact remains, how well are the people off? Let’s not forget that stimulus packages are basically loans, the interest on those billions go somewhere, so in the end the people pay! France with its 26 billion package in 2008 would not see a positive jump until late 2013, then only 0.6%, after that until 2014, France only marginally kept its head above water. Italy does not even get close to those numbers and only had one moment in 2013 where they were positive at 0.1%, the rest is all negative. They pushed in a mere 9 billion. So with three nations, Europe has spent 44 billion and no real results to show. It could be debated as I stated earlier that the state of affairs for those nations would be a lot worse, I could agree with this on the mere premise of the thought. Yet, the one issue that should have been done, namely proper budgeting has not been achieved by any of these nations for over a decade and debts are stockpiling. This has been at the centre of my considerations for a long time.

 

Whether this is mere bad budgeting or a completely unbalanced system where corporations have been uber enabled, whilst their rights are not questioned is another matter entirely. In that regard we have the HSBC view (at http://www.theguardian.com/business/2015/apr/24/hsbc-warns-it-could-leave-uk-over-eu-referendum-uncertainty), where the option of the UK leaving the Eurozone would make HSBC move offices to other shores. Yet, when we google this bank we see articles on how they pay millions and millions less than expected. Now, these articles are not the ones you should have too much faith in, but with this much smoke, the question becomes, were tax bills burnt? I am willing to partially ignore the Swiss scandal as this is only one instance, it is the overall picture that goes far beyond just the HSBC. When we consider Libor, the fines of billions that followed with banks all over the world, we see that populations all over Europe, even on a global level are denied the funds for their support that they should be entitled to. Yet, the paths taken now are also questionable. I support to the larger extent both the Conservative path as well as the Australian Liberal party. Here we see a protection against naming apparent tax-dodgers. My reasoning? If a company engages in legal paths for revenue and investments whether on shore or offshore where the tax laws allow for it, the companies who are creative enough to exploit the loophole shouldn’t be punished. This is at the core of the issue, the tax system has to be fixed and altered. Yet, as we see with HSBC, politicians are often too scared for their own political hide (as I personally see it) and will push forward any tax change. This has gone on for over a decade and many changes are yet to be properly addressed. This is at the heart of the matter.

In the end, what is the wisest of actions? To cater to HSBC and mind liking parties that seem to pay the minimum in taxation, whilst at the same time, the millstones of debt are dragging down all European nations? The UK might have the highest European debt (1.7T), yet the path that the conservatives have taken its population has the best options to lower the debts whilst offering a modest growth. The inability of the other European nations to adhere to this is only one of several factors. Greece is now becoming a larger issue as their timeline of pushed from April to May and now we see the mentioning of June by Yanis Varoufakis: “We wish to merge the current review with the June agreement“, which is now a more pressing issue as the voters in May would steer fast into a direction many will not like, this is the danger, as emotion drove Greeks towards Syriza, that same dangerous move could push the UK voters stronger towards UKIP and the Euro exodus that could follow. Another version where we see a legal incitement away from the Euro, there is no inspiration, just a need for what could be regarded as ‘false sense of security‘. That danger only increases when we consider the next quote: “Tsipras said he was optimistic an interim agreement would soon be reached. But Greeks know another bailout will be needed even if the short-term €7.2bn is secured“, that part and the inability of the Greek government to seriously commit from day one is at the heart of all this.

A need to incite a tax system that works more honest towards the nations that give ‘free’ protection to the corporations that seem to shun a moral refinement is needed. Not just for the UK, but for all European nations. Yet, will this happen? This is the question we should ask when we look at the papers from the IEA (Institute for Economic Affairs), where we saw on December 1st 2014 the following quote: “Despite the Conservative’s pledge to raise the threshold to £50,000, over 5 million taxpayers will pay the higher rate of income tax by the end of the next parliament. Indeed, it is likely that the number of higher rate taxpayers will continue to increase even if the threshold is raised“. I question the spirit of this. You see, the groups are 24.1 million in the basic rate and 4.5 million in the higher rate (source: UK Statistics Authority). I do not deny these numbers, yet, raising the threshold will force other measures too. A more immediate and more just move would be to increase the 0% rate from £10.6K to £13K, which will also benefit the higher rate to some extent (£2.5K less taxable), after this I personally advocated raising both groups, the Basic rate +1% and the higher rate +2%. he reasoning is simple, in the end a budget has to be met, even though we see these ‘holier than thou‘ groups all moving for more tax breaks, yet, in the end, until tax loops and tax havens are dealt with, the tax coffers will remain massively underfunded. Let’s not forget that the UK has to meet a 1.7T issue, all using official bank notes with the ‘£’ symbol (replacing IOU’s in place). If the IEA really wants to push certain tax shifts without properly balancing the equation, we will see a push for drastic austerity sooner rather than later. It is not a mere guess, it is an outcome of mathematical certainty. Only after a serious dent has been made in the total debt, then it would be possible to consider a change. All this is now endangered when we see ‘promises’ by Ed Miliband as he states: “Labour will pledge to deliver a surplus in the current budget as soon as possible in the next parliament. This could allow the party to borrow to fund capital investment for infrastructure projects“, so a surplus and MORE borrowing? So basically he will likely spend his budget and the budget of the next administration in one go. The UK is still dealing with the borrowing acts of a previous governing labour. I see at the heart of ANY government at present, the need to borrow ZERO, whilst still reducing the overall debt to some degree (not possible to state by how much), this is the only way to incite true growth, to inspire a growing economy and to stimulate some version of ‘quality of life’. There are a few steps that any of the elected parties could do, but that requires vision, I have some answers, but filling that solution will take a different view, not one of borrowing, but one of an adapted vision that allows for new growth by changing the equation of costing, a different approach to a changing world where the UK moves ahead stronger still, which will be good for the entire Commonwealth at large!

An act to incite stimulus through Inspiration, a positive wave not based on pre-spending.

 

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