227 (26 August 2015)

Welcome to week 227!  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 an Internet title search.

(20 August 2015).  What follows is a series of articles that appeared in The Wall Street Journal the morning before the Dow Jones Industrial Average fell by 358.04, or 2.1%, and closed below 17,000.  You can see the components of the DJIA, i.e., the 30 stocks that are used to compute it, at: http://money.cnn.com/data/dow30/.

“Likelihood of U.S. Oil Sliding to $30 a Barrel Is Increasing” [SR](http://www.wsj.com/articles/likelihood-of-u-s-oil-sliding-to-30-a-barrel-is-increasing-1439997047)

——–“As the U.S. oil price tumbled toward $40 a barrel on Wednesday, an increasing number of analysts and traders are saying crude could drop into the $30s—and soon.  The move to a price last seen during the financial crisis, in March 2009, could come amid a seasonal falloff in demand, coupled with concerns about the Chinese economy and the continuing global glut of crude.  Cheaper oil would bring further joy to consumers and businesses around the globe, but more pain for everyone from Russian budget officials to U.S. shale-oil drillers.”  According to oil strategist Chris Main of Citigroup Inc., “Given where we are now, there is a 90% likelihood that we will dip into the $30s.”  In a similar vein, Daniel Yergin, a long-time chronicler of the energy industry and vice chairman of HIS Inc. noted: “We are seeing the final act of the China-led commodity super-cycle right now, and that is affecting oil . . . And with the current oversupply on the market and the specter of the return of Iranian oil, we could certainly revisit the lows of the financial crisis.”

“Canadian Oil-Sands Producers Struggle” [SR](http://www.wsj.com/articles/oil-sands-producers-struggle-1440017716)

——–“Canada’s high-cost oil-sands producers are struggling as oil prices sink to fresh six-year lows, and even the most efficient drillers are losing money on every barrel they produce at current prices . . . Canadian oil-sands production has grown 30% over the past five years but the recent price slump has hit producers’ bottom lines and forced them to suspend development of new projects.  Western Canadian heavy crude costs more to extract than other oil sources because it must be separated from deposits of sands.  It also trades at a discount to other crudes, in part because of the distance it must be transported from remote boreal forests in Alberta.”  Currently, benchmark West Texas Intermediate oil costs less than $41 a barrel, whereas the Western Canadian Select average was about $24 a barrel.  According to TD Securities Inc., “More than half of current oil-sands production can’t break even unless WTI crude-oil prices rise above $44 a barrel.”

“Energy Slowdown Hits One Town Hard” (http://www.wsj.com/articles/energy-slowdown-hits-one-town-hard-1440008970)

——–Business in Waynesburg, Pennsylvania took off over the past eight years as fracking expanded.  But since January sales at Producers Supply Co., which provides “everything from Gatorade to valves to the crews drilling into natural-gas reserves a mile underground,” came to a halt as “the number of drilling rigs operating in the Marcellus Shale has plummeted to 70 from 131 at the end of the year.”  At the same time, “The economic pain from lower oil and gas prices is spreading to small towns and businesses across Pennsylvania and parts of Ohio and West Virginia that had been riding a wave of prosperity from the natural-gas shale boom.  Now, companies that cater to drillers, as well as hotels, restaurants and even farmers, are feeling the pinch.  A similar story is playing out in the oil fields of North Dakota, Oklahoma and Texas.”

“Auto Industry’s Ranks of Electric-Car Battery Suppliers Narrow” [SR](http://www.wsj.com/articles/energy-slowdown-hits-one-town-hard-1440008970)

——–“Luxury car maker Audi AG on Wednesday revealed its first all-electric car would go 310 miles on a charge using an advanced battery developed by South Korea’s LG Chem Ltd., one of three Asian suppliers increasingly favored by car makers.  Failed technology gambles and a half-decade of jockeying among suppliers have top auto makers increasingly choosing LG, Samsung Electronics Co.’s SDI unit and Panasonic Corp.  The three are emerging as the early winners amid a shift by car companies away from in-house efforts, traditional battery makers and startup ventures.”  According to Lux Research Inc., an emerging technology research firm, “the market for electric-vehicle batteries will grow to $30 billion by 2020, from $5 billion this year.”  It predicts that the three Asian suppliers “will split most of that pie.”

********The articles above illustrate just a few of the causes and consequences of price changes in oil and gas industries, and some of their consequences.  The first article, “Likelihood,” provides some information on oil price per se.  The price is continuing to fall, dramatically.  The comments of Main and Yergin suggest some causes.  The second article, “Canadian Oil-Sands” indicates the reduced production activity in Alberta as a result of lower price.  The third article, “Energy Slowdown,” indicates some of the consequences for small businesses and communities resulting from reduced oil and gas production.  Finally, the fourth article, “Auto Industry,” addresses one of the technologies that is likely to dampen the demand for oil in the future.  Taken together, the four articles provide a glimpse of how changes in the demand for and supply of oil and natural gas are contributing to price change on those markets directly and on other markets secondarily.  In all of the above, no mention was made of recent actions by the EPA that will also have an impact (http://www.nytimes.com/2015/08/19/us/epa-announces-new-rules-to-cut-methane-emissions.html).  You can read an analysis of the large decline in the DJIA on August 20 at: http://www.wsj.com/articles/u-s-stock-futures-fall-on-growth-worries-1440073541.  Finally, here is some advice about what not to do in the days and weeks to come in light of recent unsettling financial news: http://blogs.wsj.com/briefly/2015/08/21/5-things-investors-shouldnt-do-now/.

(21 August 2015): “For a Rare Disease, Drug Trials Scramble for Patients” (http://www.wsj.com/articles/for-a-rare-disease-drug-trials-scramble-for-patients-1440013683)

——–“After years of effort, scientists and families of young patients with the genetic condition Niemann-Pick Type C are in a position to which any rare-disease community aspires: the prospect on not one, not two, but three companies launching clinical trials to develop therapies.  But the flurry of commercial interest has sparked an urgent debate.  Can the community support more than one trial at the same time?”  Pharmaceutical companies “need to enroll enough patients to demonstrate results . . . [But the] pool of eligible patients . . . is small . . . current estimates put the number at around 500 world-wide.  As companies compete for participants, some scientists and families are worried that they may siphon patients away from each other, and the result will be that no trial has the heft to get a drug approved.”  As Mayo Clinic neurologist Marc Patterson comments, “If you are the primary proponent of a study, however object you try to be, it is very hard not to regard other competing studies as a threat.”

********The competitive nature of science has been noted at least since the publication of The Double Helix (http://www.amazon.com/Double-Helix-Personal-Discovery-Structure/dp/074321630X/), by Nobel Laureate James D. Watson.  A musical take on the competitiveness of science is provided by the song “Race for the Prize,” by The Flaming Lips.  You can view the music video at: http://www.amazon.com/Double-Helix-Personal-Discovery-Structure/dp/074321630X/.  Finally, discovery and ignorance play important roles in the scientific process, whether competitive or not.  In addition to the references in last week’s TIF Weekly, there are useful and new citations in the opinion piece “The Case for Teaching Ignorance” at: http://www.nytimes.com/2015/08/24/opinion/the-case-for-teaching-ignorance.html. Especially interesting is the extended metaphor attributed to social scientist Michael Smithson of Australian National University: “The larger the island of knowledge grows, the longer the shoreline—where knowledge meets ignorance—extends.  The more we know, the more we can ask.  Questions don’t give way to answers so much as the two proliferate together.”

(22 August 2015): “The Power Revolutions” (http://www.wsj.com/articles/the-power-revolutions-1440172598)

********This is The Saturday Essay, this week by Daniel Yergin, the Pulitzer Prize-winning author of oil industry saga The Prize and vice chairman of HIS.  Yergin brings his considerable experience and knowledge of energy to provide perspective on “two big innovations . . . playing out across . . . the energy landscape.  One of them is renewable: solar energy.  The other in conventional: shale gas and shale oil.”  As Yergin notes, “energy transitions are nothing new.  They have been going on for more than two centuries.  They have been transformative and undoubtedly will be again—but if history teaches anything, it is that they don’t happen fast.”  According to energy economist Yaclav Smil, “The most important historical lesson . . . [is that] energy resources require extended periods of development.”  According to Yergin, “A no less important lesson is that, even as newer sources overtake older ones, they also overly them; the older hardly go away.”  What is different, though, about the current changes underway is the role of climate change and policy shifts in relation to it.  “Previous transitions have occurred because of new technology and applications, changing costs and prices, and concerns about energy security.”

********There are some places where electricity derived from solar costs roughly the same as electricity derived more traditionally—Texas, “a state that . . . doesn’t offer incentives to utilities to buy or build sun-powered generation.”  You can learn more in the article “Next Texas Energy Boom: Solar” (http://www.wsj.com/articles/next-texas-energy-boom-solar-1440149400).  As noted in the article, “West Texas ‘is flat, the land is open, available and cheap and there is a lot of sun . . . It is an ideal place for putting solar.”  You can learn more about Vaclav Smil at: http://www.vaclavsmil.com/.

(22 August 2015): “Free exchange: Graduate stock” (http://www.economist.com/news/finance-and-economics/21661678-funding-students-equity-rather-debt-appealing-it-not)

——–Presidential candidates Hillary Clinton and Marco Rubio have made proposals to revamp the funding of higher education, with the notion of “income-based repayment” playing a major role.  This is especially with respect to Rubio, who “wants income-based repayment with a twist.  Instead of borrowing to pay for college, students could sell a percentage share of their future income to private investors, and use the proceeds to fund their studies.  Students’ liabilities would then resemble equity rather than debt.”  This idea “was floated by Milton Friedman in 1955.

********The one-page article goes on to discuss advantages and disadvantages of the equity approach, both of which seem substantial and provide examples of the ecological adage “You can’t do just one thing.”  The 1955 article by Friedman is “The Role of Government in Education,” which appeared in Robert A. Solo. ed., Economics and the Public Interest (Rutgers University Press).  You can read it at: http://faculty.smu.edu/millimet/classes/eco4361/readings/friedman%201955.pdf.  This is an earlier version of the oft-cited chapter by the same name that appears in Friedman’s 1962 book Capitalism and Freedom (http://www.amazon.com/Capitalism-Freedom-Anniversary-Milton-Friedman/dp/0226264211/).  It would be interesting to see if his ideas changed in any meaningful way over those seven years or, for that matter, over his lifetime.  While searching on the Internet, I came upon The Friedman Foundation for Educational Choice (http://www.edchoice.org/who-we-are/our-founders/).  I hadn’t realized that Rose Friedman, the wife of Milton, was an ABD in economics from the University of Chicago.  I sense a larger story.

(23 August 2015): “Canadian Maple Syrup ‘Rebels’ Clash With Law” (http://www.nytimes.com/2015/08/23/business/international/canadian-maple-syrup-producers-clash-with-law.html)

——–“While many Americans associate Vermont with maple syrup, Quebec is its center.  The province’s trees produce more than 70 percent of the world’s supply and fill the majority of the United States’ needs.”  The organization that largely controls the production and sale of maple syrup is the Federation of Quebec Maple Syrup Producers, which was formed 49 years ago.  The group came into the public eye in 2012, when “$18 million of maple syrup was stolen from the global strategic reserve, a warehouse where the federation stockpiles the sweetener.”  The federation’s higher profile “exposed the controversial methods it uses to police the market.  When the federation suspects farmers are producing and selling outside the system, it posts guards on their properties.  It seeks fines from producers and buyers who do not follow the rule.  In the most extreme situations, it seizes production.  The federation is unapologetic.  It defends the system, saying kit keeps prices high and stable.”  But there are those who are intransigent, producer Robert Hodge being one of them.  About the system, he notes: “Well, I don’t accept the system because I don’t believe in not being able to sell our product . . . We just think that the product is ours.  We bought the land.  We’ve done all the work.  Why should we not be able to sell our product the way we want as long as we legitimately put it in on our income tax?”

********A five-minute video accompanies the article.

(24 August 2015): “As Smoking Declines, Tobacco Makers Seek to Slim Down Brands” (http://www.wsj.com/articles/as-smoking-declines-tobacco-makers-seek-to-slim-down-brands-1440369674)

——–With global tobacco volume dropping by 3.5% in the first half of this year, tobacco companies are consolidating brands, an exercise that is called “brand migration” by those in the consumer-products industry.  As the CEO of Imperial Tobacco emphasizes, however, “It’s not the brand we are migrating . . . it’s the consumer.”  Such a migration “is often an elaborate marketing exercise that can take years to execute.”  It is thought that “Consolidating brands allow tobacco companies to innovate faster—since a single change can be rolled out across more markets—and can drive economies of scale in production, marketing and advertising.”  Brand migration, though especially a current issue for tobacco companies, takes place in other sectors, e.g., foodstuffs and detergent.

********The online article contains a vivid illustration of the packaging changes associated with the migration of Spain’s Brooklyn cigarette to the more widely distributed West, which provides a sense of some of the necessary marketing adjustments.  It makes me wonder about the role played by product durability in relation to the length of time toward brand migration, as well as the nature of the marketing plan.

(26 August 2015): “Waukesha Plan for Lake Michigan Water Raises Worries” (http://www.nytimes.com/2015/08/26/us/waukesha-plan-for-lake-michigan-water-raises-worries.html)

——–Waukesha, Wisconsin is seventeen miles from Lake Michigan but is situated just outside of its basin.  Currently the city of 70,000 is confronted with a lowering aquifer and contamination issues in its water.  It would like to run a $200 million pipeline to Lake Michigan to supplement its water supply but such a project runs “smack into a landmark 2008 compact that prohibits large amounts of water from being pumped, trucked, shipped or otherwise moved beyond the system’s natural basin without approval from the governors of each of the eight states that touch a lake—unless it is in a product like beer or soft drinks.”  The response to Waukesha’s request has drawn a lot of attention.  As March Smith of the National Wildlife Federation notes, “Everyone is watching this . . . We don’t want the first test of the [2008] compact to show that it doesn’t work.”

********Quoted in the article is Peter Annin, of Northland College in Ashland, Wisconsin, who is the author of The Great Lakes Water Wars (http://www.amazon.com/Great-Lakes-Water-Wars/dp/159726637X/).  The book is appreciatively and usefully reviewed in the Natural Resources Journal (http://lawschool.unm.edu/nrj/volumes/47/4/11_cain_greatlakes.pdf).  The comments in the Times article made me think of routinely encountered arguments involving dominoes, camels, and slippery slopes, all of which seem to leap from “small” causes to “large” effects.  All of these are examples, to my mind, of “catastrophizing,” which is “a commonmilcognitive distortion that has been extensively studied in psychology.”  There is a nice summary of these, indeed the source of the foregoing quoted words, at: https://www.psychologytoday.com/blog/in-practice/201301/what-is-catastrophizing-cognitive-distortions.  In some sense, I suppose, catastrophic arguments have become more attractive in this age of “butterfly effects” and “chaos.”  You can learn more about both at: https://en.wikipedia.org/wiki/Butterfly_effect.

May you have a good week!

Bruce

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