Tag Archives: Oil

Second Order Questions and Sterilising the Oil Price Effect

February 5, 2015 By in Oil Tags: ,

Consider, if you will, an oil exporting nation. Consider further those nations whose commodity exports far exceed their budgetary needs. What is a nation to do with such excess wealth?

There are two main approaches to this. The first is the more conventional strategy inherited from central banks, in many ways the precursors to SWFs. This method, which I will call risk-off, seeks simply to hold foreign exchange reserves, usually the US dollar, in the form of high quality, low risk assets, usually US Treasury bonds.

The second strategy, which I will call the risk-on, borrows heavily from pension and endowment funds. Investments are made not to protect value, but to create value so as to meet future obligations. Not only is public equity as an asset class targeted, but all manner of alternative investments including but not restricted to private equity, hedge funds, real estate and high yield debt.

So as not to confuse the point that I am trying to make, I would like to clarify that there is no right or wrong to which method a government chooses, as the choice is driven by policy considerations not investment considerations.

Back to our story. If an oil exporting country with a risk-on strategy suddenly faced oil prices dropping by 50%, what is the net effect to its revenue? Using Norway as an example, their circa 1.7 million barrels per day of export would lose USD 85 million per day in revenue or USD 31 billion per year.

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The Bluff: An Important Strategy Tool

January 25, 2015 By in Game Theory Tags: , ,
This entry is part 3 of 6 in the series Negotiation

There seems to be a strong belief that playing poker teaches people how to invest or run a business. This is of course nonsense. The mathematics behind poker is complex and needs years of formal study to understand the game. The more appropriate notion is that a strong understanding of game playing is extremely useful to investing and business.

The branch of mathematics relevant to game playing is not, as most believe, probability but is called, not surprisingly, game theory. Game theory was made famous by the film A Beautiful Mind, depicting the life of one of the main developers of this mathematical field.

In this article I’d like to address just one facet of a successful poker strategy and that is bluffing. Somehow bluffing has taken on the connotation of lying or otherwise being dishonest. Many of the proponents of “poker as a substitute for an education” believe that this gives them license to be dishonest in their business dealing, in particular in negotiations. Their interpretation is wrong both mathematically and ethically. They might not care about the ethics, but from a mathematical point of view, lying is extremely sub-optimal and completely misses the point.

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Saudi Oil: Through the Looking Glass & Other Adventures in Investing

December 10, 2014 By in Oil Tags: ,

About a month and a half ago I wrote an article on the sudden drop in oil prices, pointing out some basic errors in the media analysis and providing alternative interpretations for what was going on. The media flurry continued, and the errors in reporting and analysis also continued. So I wrote a second article diving in deeper into the analysis. The media storm continues unabated. To understand the insanity, Reuters on 17 November reported that hedge funds where net short oil. On 8 December Reuters announced that hedge funds were net long oil. What gives? Continue reading →

Saudi Oil Price Redux

November 19, 2014 By in Economy Tags:

In an earlier article I corrected some common misconceptions on what is happening with oil prices and how it affects the economy. This generated some feedback and further questions that I will address in this article. In particular I will focus on understanding the role of a cartel, the long term incentives of an oil producer and why oil prices have risen.

Let’s start with the concept that OPEC is a cartel. It isn’t because it lacks a major feature of a successful cartel: legal enforceability of quotas. To understand OPEC’s actual role in the history of oil, you need to start with the Texas Railroad Commission (‘TRC’). The TRC is the original cartel that controlled global oil prices and was an agency of the State of Texas that controlled up to 40% of US production until the late 1950s. Their power was derived from an oil production boom that saw prices plummet and Texas oilmen demand a cartel system of enforced quotas. The TRC served as a model for OPEC. The irony is not lost upon this writer. Continue reading →

Saudi Oil Price, the Global Economy and Correcting Media Economists

October 29, 2014 By in Economy Tags: ,

The hysteria surrounding Saudi Arabia’s increase in oil production and a subsequent drop in oil price to the mid-eighties and possibly lower is non-sensical. It’s nearly as bad a media reaction as if oil prices had moved the same amount upwards. Reports in the media have focussed on the possible political machinations of such a ‘dastardly’ move and the economic effect on oil producing countries not least of which is Saudi Arabia. Personally, the first thing that comes to my mind is that oil has dropped around 30% in the last few months and that is great news for the global economy and the world’s population. Why aren’t people rejoicing?

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