NIMBYs are Killing America

  Let me first clarify that I am not a Glenn Beck-style doomster; I don't actually think any one thing will "kill" America. It is a large and prosperous country that is undergoing some economic difficulties, true, but it will not "die".

   Some of what Americans hold dearest, however, will "die". Cheap gasoline, for one. Right now all over the country there are news headlines decrying the price of gasoline. Friends ask me how they can help stop oil speculation: Can they write their congressmen? Can they start a campaign? Republicans blame President Obama. CNN and network anchors shake their heads but offer little explanation apart from noting that Iran has stopped exports to British and French oil companies. Speculation is blamed, as usual. 

   But the speculation is based on the perception of higher prices in future, because of a lack of supply and a surfeit of demand.   As Ian Taylor, CEO of oil trading firm Vitol, said: “The supply side of the market is a mess." Taylor, speaking at IP Week in London, noted: “Demand, even if not great, continues to grow. So it's difficult to see much price downside from current levels.”

   The supply side is a mess for many reasons, most of them political. The crude oil dilemma is not the one that should worry people, though. On balance, there is plenty of crude oil and other refinery feedstocks. Natural gas and shale gas (from hydraulic fracturing or fracking) are plentiful, as is the mucky crude squeezed from oil sands (mainly in Canada). The problem is there is little infrastructure to support the shipping and refining of these feedstocks.

   Enter the NIMBYs. The Not In My Back Yard syndrome seems counter to what Americans actually want, which is cheap oil. Most recently the Keystone pipeline, designed to carry oil from Alberta to be refined in multiple places in the U.S., was delayed because no one wanted it to run through their backyards. Plants designed to liquefy natural gas, thereby making it moveable on tankers, are being turned down all over the country. Fears over terrorist attacks on the plants or the tankers are cited, but the real reason? NIMBY. The same NIMBY spirit has scuppered wind and solar farms, waste-to-energy projects, waste-to-fuel plans and hundreds of other ways in which the US could provide more of its own energy.

   One of the biggest problems in the US is the shortage of refinery capacity. There has not been a new refinery of any decent size built in the United States since 1977. Why? NIMBY. If anything, refineries are disappearing. I have written about this before, I know, but it bears repeating. We have lost 500,000 barrels per day of refining capacity on the U.S. East Coast in the past year. These provided nearly 3% of daily U.S. refined products consumed. Most recently the St. Croix Hovensa refinery, operated by Hess and PDVSA, the Venezuelan state-owned oil company, closed removing 350,000 b/d and about 13% of the East Coast's gasoline. It is true that many of these closed due to lousy profit margins. But selling them was not a viable option because any company that bought them would bear unlimited liability for any environmental problems - past or present - that arose. And refineries can be dangerous (explosions are not uncommon) and polluting (ditto spills). NIMBY, thanks very much. 

   But then I won't complain about the price of gasoline - because I think it is too cheap. Gasoline has been too cheap in the United States for a very long time. The low cost of gasoline led to the production of giant SUVs and pickup trucks that can carry a baby elephant and haul its mother on a trailer (the over-reliance in Detroit on producing and selling these relics nearly destroyed their industry altogether). Cheap gasoline gave us roads where there were once railroad tracks; roads which are now crying out for improvement and expansion to handle even more cars. It led to vast, soulless suburbs from which you cannot commute or shop without cars.

   So I say "good" to higher gasoline prices. To the government I say build us some railroads and let us put up waste-to-energy incinerators (cleaner emissions than burning natural gas, believe it or not); to the car companies I say give us smaller, fuel-efficient cars. To home builders I say make the cities more liveable and affordable and let the suburbs die. But the NIMBYs will win, as always. And they will HATE $5.00 gasoline.

Susan G. Komen: How Not to Manage PR

  I frequently write PR material for a company that produces software enabling companies to sense and respond to business events and/or crises. Innovative companies can thus anticipate things that might happen that could spell disaster and avoid them - or even profit from them. One of the examples we are using in a book about this (I am ghostwriting part of it) is the BP oil spill. BP badly misjudged the power of social media and the US Gulf oil spill became an international scandal. From premature press releases about how minimal the spill was, to badly-timed yacht trips by its CEO it was a monument in how not to handle a crisis. BP's CEO Tony Hayward was ejected, the share price was shredded, and the furor no doubt jacked up BP's legal bills and settlements by billions of dollars.
  Lessons that should have been learned from this apparently sailed over the heads of the executives at breast cancer non-profit Susan G. Komen. When it decided to jettison one of its mainstay partners, Planned Parenthood, Komen completely misjudged the public reaction. Twitter caught fire with mostly outraged Tweets the morning the news hit (Feb. 2) and Komen's Facebook page attracted thousands of comments - predominately negative. Komen released a holier-than-thou video blog from its CEO Nancy Brinker further fanning the flames, then a day later changed its excuse - then changed its mind and put PP back on its "Friends" list.  Now if only it could claw back the goodwill it lost in the space of 24 hours.
  According to news stories, Komen execs had months to think about the possible backlash, but failed to take any pre-emptive actions. They even let PP send out the first press release, completely failing to anticipate the backlash. That one of its execs was fervently pro-life and had a vendetta against PP never entered their minds? The fact that women don't care about politics when it comes to their bodies, as long as they can get proper care and make their own decisions about pregnancy? Idiots.
  I was never a supporter of Komen, the over-marketing of pink ribbons and T-shirts (and even a limited edition pink Smith and Wesson pistol - seriously!) put me off. I tend to avoid organizations that market themselves too aggressively, figuring they must be hiding something. Any organization with a brand as recognizable and strong as Komen's should have realized that brand management includes anticipating crises, complete with plans to respond to and mitigate damages. In the case of Komen, technology is not the answer, common sense is. But, as Voltaire said: "Common sense is not so common."

UPDATE: Get Ready for $5.00 Gasoline

UPDATE to my blog dated 12/29/2011

 Added to the 500,000 b/d of lost production in closed/closing US refineries (see blog below) we now face the loss of the venerable St. Croix Hovensa refinery, operated by Hess and PDVSA, the Venezuelan state-owned oil company, says CNBC. The refinery produces 350,000 b/d and supplies about 13% of the East Coast's gasoline. Hello $5.00 per gallon.

Get Ready: $5 Gasoline on the Horizon

Iran's (probably) hollow threat to close the Strait of Hormuz is a danger that has long faced the oil-consuming world. The 34-mile wide strait offers a strategic chokehold on the Persian Gulf, and Iran appears to have the upper hand in controlling it. In my (as yet unpublished) book Trust Me, I painted a picture of what would happen if Hormuz were closed after an Iranian missile strike on Israel:

Almost 40% of the world's seaborne oil supply goes through the Strait of Hormuz, around 15 million barrels per day. The loss of this oil on the open market, even for a day or so, would send prices even further through the roof. The traders were ready. If the Strait was closed, they would hold and profit. If it didn't they would sell tomorrow morning - and still profit. There was bound to be a bit of a panic in the Asian and European markets when they opened. Oh, life was sweet! Oil markets love a good disaster.

Although Trust Me is fiction, I have drawn a fairly accurate portrait of the oil trading community. Oil is a scarce, highly desired commodity, making it a magnet for traders.

Even at today's prices oil is an extremely cheap source of energy. The reason that prices have been rising gradually but doggedly for the past 30 years is because developing nations need more and more oil to power their cars and factories. But because it comes from countries where democracy is a pipe dream and despots and dictators treat oil reserves as their personal 401K's, it will not remain cheap. From the smallest coup to the most outrageous missile strike against a neighboring country, many of the producing countries' instability is palpable, Every ripple reflects in the price of oil, making the market easy to hype and to spook.

Add to this general uncertainty the snail's pace of refinery development in the western world, and we will see refined products such as gasoline and diesel become increasingly more expensive as demand rises. In fact, the refinery count is decreasing in certain countries. In the US, few permits to build new refineries make it past the environmental lobbyists or local residents. One old, but still productive, 145,000 b/d East Coast refinery owned by Sunoco is slated for dis-assembly to be taken lock, stock and smokestack to India.

Conoco Phillips shut its 185,000 b/d Trainer, PA refinery in September, and Sunoco closed the 175,000 b/d Marcus Hook, PA refinery recently. That effectively removes over 500,000 barrels of refined product per day from the US East Coast market - nearly 3% of daily US consumption.

In Europe the largest independent refiner, Petroplus, has had such terrible margins that its $1bn line of credit has been cut off. It will be tough for it to buy crude to refine if it survives, and even tougher for it to find buyers for its five refineries in this climate if it doesn't.

If there is anyone out there who does not believe that oil prices will stay over $100 a barrel, and probably rise to nearer $200, then they are delusional. And gasoline, jet, diesel and heating oil will rise disproportionately more. Get ready for $5.00 gasoline.

Deja Vu All Over Again for JP Morgan

  Twitter is alight with MF Global customers asking for the boycotting of JP Morgan. The bank may have received "stolen goods" when MF Global settled a debt allegedly using $200m of customer money. Dealbook said:

One e-mail chain refers to the transfer of roughly $200 million that MF Global owed JPMorgan Chase on Oct. 28 — the firm’s last business day before it filed for bankruptcy. In that chain, a senior official in the firm’s Chicago office was told to make the transfer, said the people close to the investigation who requested anonymity because the inquiry was still open... The roughly $200 million that JPMorgan Chase received is said to be entirely customer money.

 This must seem like deja vu for JP Morgan, which also pulled a snatch-and-grab before Lehman Brothers hit the dust. JPM asked for two lots of $5bn each in collateral just days before Lehman collapsed, prompting speculation that it and Citi (which did a similar thing) may have caused the lack of liquidity that brought Lehman down. (The case is still in court.)
  I'm no fan of JP Morgan, it comes off as greedy and callous, but from where I sit it looks like it has some bloody good risk management people and processes. Maybe if Lehman and MF Global had had the same, they would still be around.

The Culture of Corruption

  I spent 20 years working on the fringes of the oil industry - mostly writing about trading and oil prices and OPEC, but also broking a bit and doing some (dreaded) marketing of oil price services. Once I left Platts, the oil industry bible owned by McGraw-Hill's Standard & Poors, people within the industry opened up to me a little and I got a taste for just how corrupt the oil industry is. From blatant bribery of government officials to inspectors and, yes, reporters the corruption in that business was (and still is to an extent) all in a day's work.
  The corruption I see today in the financial services arena makes oil traders look like amateurs: Rogue traders such as Kweku Adoboli at UBS, with his $2.3 billion worth of hidden trading losses; MF Global with $1.2 billion of customer money seemingly vanishing into the maw of a bad trade on European debt; Ponzi schemes such as Bernie Madoff's. 
  Few oil traders would steal money from their firms to pay a bribe or for a client's night with an 'escort'. Also, few of them would hide trading losses until they escalated into disaster. It is difficult to hide losses on a cargo that got delivered and paid for. Most of their activities, while under the radar of much of the world, were above board and known by management (if slightly less than legal).
  There is a culture of greed infiltrating the financial markets and it isn't pretty. It leads to the kinds of major corruption we saw in 2011 and all sorts of minor, though still significant, acts of creative accounting which we may never see. But shareholders and customers of these firms are paying the price. Occupy Wall Street may have had a point, even if they weren't quite sure what it was.
  Happy Christmas!

MF Global Story Goes from Bad to Personal

  The MF Global story gets worse and worse; the firm had been dipping into client funds for weeks and the customer shortfall may be as high as $1.2 billion. Therefore I was thrilled to hear that the Board resigned last week, and that Jon Corzine will be forced to testify in front of Congress. Meanwhile regulators moved quickly for a change. Bloomberg reported:  

U.S. derivatives regulators voted today to restrict how brokers can invest customer funds, acting on a delayed rule after as much as $1.2 billion went missing before MF Global Holdings Ltd. sought bankruptcy protection. The Commodity Futures Trading Commission voted 5-0 at a Washington meeting to limit how brokers invest clients’ margin in money market funds, and ban investments in foreign sovereign debt and in-house transactions such as repurchase agreements.

  This is a good start, but it doesn't address the client money segregation bit of the problem. In today's FT, two professors had some suggestions though. Darrell Duffie, Professor of Finance at Stanford University’s Graduate School of Business, and Joe Grundfest, Professor of Law and Business at Stanford Law School and a former Commissioner of the SEC, penned a comment suggesting that the rules be more stringent. 

  They offered two possibilities: 1.) Segregate customer funds with an independent custodian, and 2.) Form an information-technology firewall at the broker, creating a “virtual custodian”. Both of these are valuable and realizable solutions. So why did the comments to the article say things like this is "old news" and one wondered why such a big deal is being made of "tiny MF?"

  I'll tell you why it is a big deal. A good friend of my husband's, his boss, and some colleagues of his are missing hundreds of thousands of dollars of their investments. MF Global has made good only a tiny percentage of their money thus far, and they are very concerned that they may not get any more back. And I know people who are MF Global employees, they are also receiving a good rogering by the firm; part of their compensation was tied up in MF Global shares which are now as good as worthless.

  The fallout is large, it is personal and it tells a story of what happens when transparency is not mandated. And although investors are getting more savvy, as purported by the FT's Gillian Tett's column on November 24th, it should not be incumbent upon them to inspect every crevice and cranny of their broker's books before they turn over their money to be invested.