205 (25 March 2015)

Welcome to week 205!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-156, and a cumulative pdf for issues 157-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(19 March 2015): “Non-U.S. Shales Prove Difficult to Crack” [SR](http://www.wsj.com/articles/oil-giants-break-their-picks-trying-to-crack-non-u-s-shales-1426735258)

——–“After spending more than five years and billions of dollars trying to re-create the U.S. shale boom overseas, some of the world’s biggest oil companies are starting to give up amid a world-wide collapse in crude prices.  Chevron Corp., Exxon Mobil Corp. and Royal Dutch Shell PLC have packed up nearly all of their hydraulic fracturing wildcatting in Europe, Russian and China.”  As a result, “Outside the U.S., where fracking has produced a historic glut of oil, only China, Argentina and Canada have commercial shale production,” despite the estimate that “America holds less than 10% of the world’s estimate shale reserves.”  Drilling costs are an important factor in these differential rates of development: “Wells in Poland and China can cost up to $25 million each, while American well on average cost about $5 million.”

********The global price of oil, unsurprisingly, will affect the development of shale oil resources.  Perhaps a bit more surprising is the role of prices in oil theft in Nigeria.  The article “In Nigeria, Oil Price’s Slide Deters Theft” [SR](http://www.wsj.com/articles/in-nigeria-oil-prices-slide-deters-theft-1427240404), notes that in the Niger Delta of Nigeria, “Oil is so cheap these days that for people around here, it isn’t worth stealing anymore.  Just months ago, villagers regularly took hacksaws to pipelines . . . [diverting] Hundreds of thousands of barrels of crude . . . daily into buckets, jerrycans and drums that were loaded into canoes. . . . But now, prices low, the risk of getting busted by Nigeria’s navy now outweighs the get-rich rewards of sabotaging pipelines, stealing oil and smuggling vast quantities of it onto international markets.  Indeed, some of these thieves have reverted to plunking fish traps in the waters they helped pollute.”  With oil theft diminishing, some of the major oil companies that had abandoned oil production in Nigeria are considering a return.

********One final look at oil prices.  On a global scale, there are two prices of crude oil that are well-known and commonly reported: West Texas Intermediate (WTI) at Cushing, Oklahoma, and Brent, historically derived from the Brent field northeast of Scotland in the North Sea.  Interestingly, the Brent field is almost depleted, currently producing “about 1,000 barrels a day in a global market of 93 million daily barrels.”  As a result, the Brent price of crude oil is based upon transactions that contain almost no oil from the Brent field.  The daily Brent price is constructed by Platts, which is owned by McGraw Hill Financial Inc.; at present, “the Brent field’s output makes up less than 0.1% of the oil—down from 100% at the benchmark’s inception.”  You can learn more about Brent prices at: [SR](http://www.wsj.com/articles/preparing-for-a-brent-benchmark-with-no-brent-oil-1426780155).  You can learn more about Platts at: http://www.platts.com/.

(20 March 2015): “India Tackles Web of Sales Taxes” [SR](http://www.wsj.com/articles/india-tackles-messy-web-of-sales-taxes-1426807881)

——–A complicated web of sales taxes exists for the states of India: “The country’s states each have their own regime for taxing merchandise, the federal government taxes services and manufactured products, and a separate levy hits interstate sales.  One survey commissioned by India’s Road Ministry found that trucks spend nearly a quarter of their time on the road in border checks or other inspections.”  Adding to challenges of trade are the many documents that must be prepared when interstate sales take place: “For Bihar state . . . a government website lists 97 different official forms.”  To confront this situation, the government of Prime Minister Narendra Modi “wants to replace the patchwork of taxes with a single, nationwide sales, levy, a move economists call an epochal lowering of commercial barriers.  A government-commissioned study estimated that a broad goods-and-services tax, of GST, would deliver an immediate boost to output of 1% to 2%.”

********The elimination of boundaries and their causes tends to expand output throughout but sometimes to the disadvantage of some parties.  In a world where compensation for losses incurred are not made, even when transaction costs are low, this means that many boundaries continue.  There is a companion article, of sorts, in The Economist of March 21, “Free exchange: Game of zones” (http://www.economist.com/news/finance-and-economics/21646772-regional-trade-deals-arent-good-global-ones-they-are-still), which notes that “Regional trade deals aren’t as good as global ones but they are still beneficial.”  You can learn more about the related concept of “customs unions” at: http://en.wikipedia.org/wiki/Customs_union.

(21 March 2015): “Professional services: Attack of the bean-counters” (http://www.economist.com/news/business/21646741-lawyers-beware-accountants-are-coming-after-your-business-attack-bean-counters)

——–“Consulting has its Big Three; accounting has the Big Four; and executive search a Big Five.  But there is no corresponding clutch of dominant law firms.  None has amassed as much as 0.5% of an industry with global revenues of around $650 billion a year.”  However, this may change as “accountants have been stealthily building up legal-services divisions.  These have now reached a size where they outgun most law firms: by headcount, [accounting firm] PWC’s legal arm is the world’s tenth-biggest.”  Furthermore, the law divisions of the accounting networks of Deloitte, EY, and KPMG “are in the top 40 by this measure.”  The full integration of accounting firms and legal firms is limited in most countries of the world, although accountants can own and control law firms in Australia, Britain, and Mexico.  In the 1990s there was a trend in the U.S. toward greater integration of accounting and law firms, but that “trend ended abruptly when the Enron scandal took down [Big Five accounting firm] Andersen in 2002.

********The article concludes that “the Walmarts and Amazons of professional services are at the gates” of the legal profession, “the legal industry’s halting pace of creative destruction is set to accelerate as a result.”  Why is it that the law seems to be “artisanal” and restricted to practice on a relatively small scale, whereas accounting seems to be able to work on a large scale?

(23 March 2015): “At the Box Office, It’s No Longer a Man’s World” (http://www.nytimes.com/2015/03/23/business/media/at-the-box-office-its-no-longer-a-mans-world.html)

——–“Heading into the all-important summer moviegoing season, two converging box-office trends are startling studios: Women are driving ticket sales to a degree rarely, if ever, seen before, while young men—long Hollywood’s most coveted audience—are relatively AWOL. . . . The shift has been noticeable enough to prompt movie executives and producers to ruminate about the causes and consider whether the big film factories should recalibrate their assembly lines. . . . Counting on the stability of young men, studios have nearly 30 superhero movies on the way by the end of 2015, each costing well over $100 million to make.  But young men are more easily distracted by other forms of entertainment, and women may now be the more reliable opening-weekend audience.”  Such changes have called in question the traditional “big tent” strategy for films, the so-called “wide and shallow” approach.  The experience of movies like “Cinderella” and “Empire,” which is aimed initially “at often-ignored African-American viewers,” suggest that a “narrow and deep” approach can be successful.

********I thought the discussion of the “four-quadrant model” used in the movie business was interesting and relevant.  According to Phil Contrino, chief analyst at BoxOffice.com, “In movie jargon, a four-quadrant movie is one that attracts men and women, young and old; Hollywood considers anyone over 25 to be old.”  You can learn more about BoxOffice.com at: http://pro.boxoffice.com/.

(24 March 2015): “U.S. Car-Making Boom?  Not for Auto-Industry Workers” (http://www.wsj.com/articles/u-s-car-making-boom-not-for-workers-1427154627)

——–“U.S. auto production is nearing all-time highs on the back of strong domestic demand and steady export increases.  But American-made cars and trucks are increasingly loaded with parts imported from Mexico, China and other nations.”  Last year every American light vehicle built had the “equivalent of $12,135 of [imported] content . . . up from $10,536 per vehicle, in 2008. . . . As the inflow of low-cost foreign parts accelerates, wages at the entry level [of the auto industry] are drifting away from the generous compensation packages that made car-factory jobs the prize of American manufacturing.”  As chief economist Sean McAlinden of the Center for Automotive Research (CAR) notes, “We’ve never produced so many cars in the U.S., but we’ve never made so few of the parts.”

********It is hard to avoid the conclusion that the U.S. auto industry has become more like an assembly operation than an integrated manufacturing operation.  You can learn more about CAR at: http://www.cargroup.org/.

(25 March 2015): “U.S. Catfish Fight Expected to Sink a Popular Import” [SR](http://www.wsj.com/articles/u-s-catfish-fight-expected-to-sink-a-popular-import-1427131633)

——–“A white flaky fish that recently overtook cod and crab to become the sixth most popular seafood in the U.S. could soon disappear from American dinner plates. . . . The fish in question—pangasius—is produced in Southeast Asia, mostly in Vietnam, and often appears on restaurant menus as basa or swai.”  Pangasius has many of the physical characteristics of catfish, which is a “closely-related cousin.  Indeed, it used to be called catfish until Congress prohibited that labeling in 2002.  Pangasius supplies could dry up as early as this year as the Agriculture Department assumes control over catfish and pangasius this spring—a job currently done by the Food and Drug Administration.  The USDA is expected to impose tough new standards on Vietnam and other countries that export pangasius to the U.S.”  In advocating tougher restrictions, U.S. catfish farmers say “the few a potential health scare related to pangasius would undermine the reputation of the catfish industry.”  But Lisa Weddig, a regulatory export at the National Fisheries Institute, a seafood trade group, observes that the fight over catfish “is not about food safety and never has been . . . For years, there has been an ongoing attempt to block imports and  thus stifle competition.  The food-safety part of the equation is a charade.”

********According to a display from the National Fisheries Institute, the relative positions of catfish and pangasius has effectively reversed between 2009 and 2013.  Catfish fell from position 6 to 8 during that time period, while pangasius rose from 9 to 6.  It appears that catfish and pangasius are close substitutes, so import prohibitions on pangasius could have a large impact on the demand for catfish, as well as its price and profitability.  You can learn more about the National Fisheries Institute at: https://www.aboutseafood.com/about/about-nfi.

May you have a good week!

Bruce

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