The Enlightened Despot

The vast majority of U.S. Senators are fairly skilled at passing themselves of as more or less sane and capable of semi-rational thought. Every now and then a Ted Stevens comes along, but it’s rare. The same, however, cannot be said for the House of Representatives, which is always populated with the overtly crazy, the profoundly ignorant, the utterly inarticulate, and the good old fashioned dumb. Maxine Waters, whom you would not leave alone with your children in a million years, has been in the House for almost two decades, and that’s pretty much par for the course. But no matter how often I remind myself of this fact, these legislators still have the power to astonish me:

(h/t Chris Orr)

UPDATE: Note that this video was posted by (someone claiming to be) Representative Barton himself. As you can see from the title, and from his comments on Twitter posted by Orr, Barton is actually pleased with his performance here, and thinks he showed Chu up. This man should not be allowed to wield sharp objects without supervision. Democracy is an ugly business.

I just found a new term to tuck away in my super-senior tranche of economic buzz-words: ’super contango’. The market for a non-perishable commodity is said to be in contango when futures for that commodity are trading for more than the current ‘now price’. (The reverse situation is called ‘backwardation’, which means that no matter what is going on in the market for a commodity, you can’t describe it with a straight face.) This is a fairly natural state of affairs, as commodities have a quality that is rare in finance: they actually exist in space and time. This means you have to keep them somewhere, and storage space costs money.

‘Super contango’ is a term currently popular to describe a situation in which futures are trading for more than the cost of storage and transfer; that is, I can sell you a promise to deliver $2000 worth of oil next month, buy that oil right now for $1000, spend $500 storing it and shipping it (generally to Cushing, Oklahoma, which, it turns out, is where crude oil deals go down), and walk away with $500 risk free. This, supposedly, is the situation we are in now.

You don’t have to be a hardline efficient markets theorist to think there is something wrong with this picture. Sometimes there is a free lunch, but it’s seldom well-advertised, and there’s never adequate parking. Kevin Drum mulls over a few possibilities:

So what’s going on? One possible explanation is that most of the easy storage is already full, so it’s not really possible to make a quick buck on this even if you want to. But even if that’s the case, there’s yet another option: oil producers can pump less oil now (essentially “storing” it in the ground) and then pump it out in July for delivery at the higher price. But apparently they’re not doing that. John Hempton figures there are two possible explanations: (1) they’re already pumping at full capacity, so they can’t promise to pump extra oil in July even if they want to, or (2) oil producers are so desperate for cash that they’re willing to take money now even if it’s way less than they could get for the same stuff six months from now.

#1 doesn’t seem to be true. So that leaves #2: thanks to plummeting oil prices, OPEC countries are in serious economic turmoil and desperate for any cash they can get their hands on right now. Either that or else there’s an option #3 that’s not obvious.

Let’s back up a bit. Screw OPEC, why aren’t you making free money off this? There are a number of reasons, but most of them come down to the inconvenience of trading in real objects. As KJ points out, there may be a shortage in storage capacity, meaning that hanging on to oil is going to cost you a lot more than what economists think it should cost you when they claim we’re in a super contango. If you do find a place to store your oil, it’s going to be a big place - the storage and transport costs won’t work out unless you’re dealing with a whole lot of oil. A year or two ago, perhaps you could have raised a few hundred million in mortages on your mobile home, but credit is a lot harder to come by these days. And nothing is really risk free: if Somalia is inbetween Oklahoma and your oil vendor, you might have some explaining to do a month from now.

(more…)

That is pretty surprising. It’s also a bit misleading. For one thing, the post’s author seems to think this graphic in some way undercuts the notion that our economy is extremely vulnerable to goings on in the Middle East. Nonsense. We use a lot of North American oil because we live in North America, and shipping is more of a drag than ever, what with all those pirates running amok. But the price of oil, wherever we get it, is affected by overall worldwide production, since oil is fungible. The Arab League alone produces about a third of the world’s oil. Add Iran to that total, and you have more than twice the oil production of NAFTA. We would be ‘dependant’ on Middle Eastern oil even if we never used a drop of it here. Don’t take my word for it; listen to the woman who “knows more about energy than probably anyone else in the United States of America”:

Of course, it’s a fungible commodity and they don’t flag, you know, the molecules, where it’s going and where it’s not. But in the sense of the Congress today, they know that there are very, very hungry domestic markets that need that oil first.

You betcha’!

Where does America’s oil come from? Courtesy of John Udell, here is the surprising result, viz. Africa supplies more oil than does the Middle East, and North America more than either. Follow this link for more detailed statistics.