Part 2: International Maritime Organization (IMO) - About to Cause and Oil Spike?

In Part 1, I look at the potential spike in oil prices due to an International Maritime Organization (IMO) ruling to reduce the sulfur content in the fuel that shippers use. They ruling seeks to reduce the sulfur content from 3.5% to 0.5%.

In this post, I look at the argument that the impact to oil prices will be minimal.

Counter Argument

Now with even Goldman Sachs, Morgan Stanley and Philip Verleger warning about this, there is always the counter argument.

The counter argument is a touch older, August 2017, via Antoine Halff.

He believes that the impact of this switch will also be mitigated via:

1. Slow Steaming -- slowing down of ships.
2. Industry consolidation.
3. Vessel Design.
4. Shorter routes -- via Panama Canal expansion.
5. Digitalization -- productivity improvements.
6. Fuel switching to LNG.
7. Battery-Powered Ships.
8. Electric vehicles -- autos
9. Non-compliance

This was written in 2017 and Bloomberg has a more recent quote from him:

“A certain amount of oil-market turmoil and a fair dose of noncompliance increasingly seem a given at the beginning of the new emissions regime”: Antoine Halff at Columbia University, citing conversations with industry participants.

And in the US News and World Report, he is quoted as saying:

"You would expect them to have a price impact during the initial period of adjustment. I wouldn't necessarily be as alarmist. At the risk of more boring, you have to be a bit more balanced."

One may argue he's a touch more concerned now than he was in August 2017. Of course, those are just brief quotes.

Regarding his arguments:

Points 1 through 5 are basically productivity gains, which I'm not sure how that impacts the fact that Verleger is saying that 1.5 to 2.0 million barrels of oil will no longer be in use and must be replaced. Point 6 is something that seems like a slow roll-out as Goldman Sachs sees LNG hitting only 5% of total maritime fuel use by 2030 so I'm not sure this would have any impact for 2020. I'm thinking 7 and 8 are immaterial for 2020. Point 9 is possible though Verleger counters that ships will be required to comply in order to keep their insurance -- as insurance companies are demanding the switchover. 

Final Thoughts

My big question is: won't this require additional oil supply? As Verleger states, this is "residual fuel oil" with little value to anyone else but the shipping industry. It is what is left of the oil once oil is processed for other more valuable products. If no one else can use it, then doesn't over-all supply need to increase?

Well, the firm that helped the IMO come up with the 2020 deadline has this to say via the Bloomberg link:

For its part, CE Delft remains confident there won’t be wild gyrations in the oil market, says Jasper Faber, the lead author of its study. No Shortage “Fundamentally, there should not be a shortage,” even if there may be an initial period of teething trouble and some regional supply issues, he said by phone.

Yeah, you'd kind of expect them to say that.

On the other hand, I'm not sure Verleger's conclusions will occur. If oil prices did hit $200, I suspect world governments would demand changes to the implementation of the ruling. Though certain countries might oppose changing the ruling, I suspect they'd be more than happy to see it postponed.

Part 1: International Maritime Organization (IMO) - About to Cause and Oil Spike?

Philip Verleger and Potential Oil Spike

Philip Verleger, an economist, recently released a paper that looked at a maritime fuel ruling that will take place starting in 2020. This ruling is via a U.N. organization called the International Maritime Organization (IMO) that regulates global shipping. The ruling will cut the sulfur content in maritime fuel from 3.5% to 0.5%. It was first announced in 2008 that this would be going into effect. The target date of 2020 was set in 2016.

To meet this requirements, the shipping industry must do one of the following three options:

1. Put scrubbers on their ships, which helps reduce the sulfur content. (I don't know what a scrubber is, but that's what I've read.)
2. Switch to LNG.
3. Buy lower sulfur content fuel.

His over-all expectation is that this ruling will be very disruptive to the world economy as his assumption is that most ships will need to go with option 3.

Sweden: Elections Sept 9th/Sweden Democrats

In early July, Bloomberg had an article up about the Sweden Democrats and there polling.

At the time of the article, the Novus, Kantar Sifo and Ipsos polls had the party at 20%. Four year prior, they were polling at 13%. The top party, Social Democrats, stood at 25%.

There were some reasons provided for this surge.

1. Too large of an influx of migrants, which has gotten too much of a focus.
2. Fear that immigrants are taking jobs away from Swedes.
3. Welfare state deterioration, specifically health care.

A month later another poll was taken. Express UK reports that Sweden Democrats are now polling at 22% while the Social Democrats dipped to 24%. At the moment, the Sweden Democrats won't have an impact on the formation of a government. According to the article:

California Pensions: Teachers and LA Times Lecture

CALmatters has an interesting review of three different school districts and how each is dealing with the coming pension crisis.

First off, what the article mentions is that the average teacher gets a pension of $55,000. That doesn't seem like an outrageous amount especially when you consider they don't get social security benefits. According to California Department of Education the average salary for a public school teacher in 2015-2016 was $77,179. I'm not sure if this is strictly salary or includes other benefits. Either way, if someone in the private sector was making that much and worked 35 years, they'd get about $29,000 a year in social security benefits (if my calculations are correct). And if that person did some 401k savings that were matched by their employer (let's target 10% of income and that obviously they weren't making $77,000 per year when they started to work), my guess is that using the 4% rule they could pull out $21,000 per year from their 401K. So that comes to $50,000. This is all back of the envelope, but what I'm saying is that teacher pensions aren't out of line with reality.

Of course, that doesn't mean that there isn't a coming pension problem and that adjustments need to be made.

Drought: Iran/Iraq/Afghanistan

I haven't written anything about Iran or Iraq since April so I decided to see what was going on. Specifically, the protests that I've been reading about. As I was reading a few articles, a common theme developed:

From the Wall Street Journal (July 3) on protests in Iran:

The latest upheavals centered in the southwestern city of Khorramshahr over the weekend, after brown fluid started running out of taps. Hundreds of residents gathered in a public space reserved for Friday prayers and blamed local officials for the lack of potable water . . . In March farmers from Isfahan province in central Iran protested long droughts.

From The Hill (July 20):

It was the culmination of a week of protests targeting Iraqi government and party offices as well as Iran, as people expressed anger over lack of jobs, electricity, water and infrastructure in southern Iraq.

Yemen: Hodeida and Bab el Mandeb strait

I think this is only the second or third time I'm mentioning Yemen in my blog so I'm not an expert in what is going on in Yemen, but you have to start somewhere. Essentially, there are Houthi rebels that are backed by Iran. Saudi Arabi and UAE are taking the lead in the fight against the Houthi.

Via Reuters, there is a discussion regarding the battle in the port city of Hodeida. This port city happens to allow food into the country. It is estimated that 8.4 million people are near starvation while 22 million are dependent on aid. Here's a key point and why the battle around this city is causing such a humanitarian crisis:

The Saudi-led military coalition fighting the Iran-backed Houthi movement had previously closed the port, the country’s main entry point for food, fuel and humanitarian supplies. In June, WFP [United Nations World Food Programme] was able to bring in three ships containing enough food for six million people for one month.

Tesla: The Big Short and Asking for Cash Back

Tesla is coming out with earnings on August 1st, tomorrow. It seems like a nice time to write on a couple interesting stories that popped up recently.

Via CNBC we learn that Steve Eisman of "The Big Short" is now a bear on Tesla stock:

The portfolio manager called the company's founder Elon Musk a "very smart man" but raised concern about the CEO's ability to follow through on lofty ambitions. "He's got execution problems," Eisman, portfolio manager at Neuberger Berman, said in a Bloomberg Television interview Friday. "He's nowhere in autonomous driving, as far as I can tell, and big competition is coming in his space next year."

I think there is no doubt that Musk is a very smart man. He's built 3 electric vehicles. But then he's also a person who likes to over-promise. And then there is the building cars in under a tent situation.

Libya: Problems on the West Front and Money

Most of my recent write-ups on Libya has focused on the east. Here's something that recently happened in the oil fields in the western part of Libya -- though nothing like the battle that occurred in the eastern terminals.

Via E & P Magazine:

Production at Libya’s giant Sharara oil field was expected to fall by at least 160,000 barrels per day (bbl/d) on July 14 after two staff were abducted in an attack by an unknown group, the National Oil Corp. (NOC) said . . . “Four of the station staff were initially kidnapped, but two of them have been since released,” it said. “Oil wells in the surrounding area have been shut down as a precaution, and all other workers evacuated.”

Who wants to bet that this unknown group abducted the four station staff due to a desire for a monetary payoff from the oil profits?

US Shale: Other Topics Other Than Supply Growth

One can't lie, the Permian Basin is booming. Per the Dallas News:

The oil industry has such a ferocious appetite for workers that it'll hire just about anyone with the most basic skills. "It is crazy," said Jazmin Jimenez, 24, who zipped through a two-week training program at New Mexico Junior College in Hobbs, about 100 miles north of Midland, and was hired by Chevron Corp. as a well-pump checker. "Honestly I never thought I'd see myself at an oilfield company. But now that I'm here -- I think this is it." That's understandable, considering the $28-a-hour she makes is double what she was earning until December as a guard at the Lea County Correctional Facility in Hobbs. 

US Shale Forecast: IHS Markit

Via the Oil and Gas Journal, IHS Markit forecasts that Permian basin oil production will double between 2018 - 2023. Per the article, that would mean oil production will hit 5.4 million bpd. This would make the Permian basin production higher than every OPEC nation outside of Saudi Arabia.

There is an interesting quote from the article:

Permian oil production already is a major force in world supply growth, the report said, adding that IHS Markit analysts expect a “stunning” level of growth that will comprise more than 60% of net world production growth.

Libya: Part 4 - LNA backs down on oil grab

I previously wrote a couple weeks back that the LNA decided to lay claim on the oil terminals of Ras Lanuf and Sidra. The terminals were originally run by the National Oil Corporation (NOC) that reports to Tripoli. My speculation was that the take-over had to do with control of the oil money.

Via the Guardian it was reported that Khalifa Haftar (LNA) backed down and handed control back to the NOC. Here are some points:

1. The US did not back the LNA move.

2. Various other allies including France, Egypt and the United Arab Emirates did not back the take-over.

Tesla: Break and Roll Test

I'm not all that positive on Tesla. I just have to believe that other car companies will start to take their market share. Also, recent news of them building cars in a tent just seems extreme. And I can't help but wonder if as a consumer it makes sense to be buying a car that was part of a stretch goal production target. Yet, when it was reported that Tesla was skipping the "brake-and-roll" test  (CNBC) I had to admit I was wondering why it was being made into such a big deal.

Tesla has decided to skip a "brake-and-roll" testing step in the manufacturing of its Model 3 vehicles. . . .“Every car we build goes through rigorous quality checks and must meet exacting specifications, including brake tests. To be extremely clear, we drive *every* Model 3 on our test track to verify braking, torque, squeal and rattle. There are no exceptions.”

Sweden - Part 2: Gang Violence, Immigration and Sweden Democrats

Reuters has an article up that perhaps doesn't provide much new information about Sweden then the post I did back in March. This is my part 2 of looking into the article.

1. It is mentioned that the police believe there are 3 or 4 gangs operating in Malmo. Okay, you're the police, and you can't figure out if it is 3 or 4 gangs?

2. In Malmo, 45 percent of the population are immigrants. In the suburb of Rinkeby, outside Stockholm, 91 percent are immigrants or children of immigrants.

Sweden - Part 1: Gang Violence and Immigration (Reuters)

Reuters has an article up that perhaps doesn't provide much new information about Sweden then the post I did back in March, but let's see what's going on. This post looks at a couple contractions I see in the article.

1. The article seems to have a couple contradictions -- though that could be based on me not properly reading the article or the article not providing necessary support information.

2. First contradiction - the article starts out with this quote:

Dozens of people have been killed in the past two years in attacks in the capital Stockholm and other big cities by gangs that are mostly from run-down suburbs dominated by immigrants. 

But then later states:

. . . official statistics show no correlation between overall levels of crime and immigration.

LIbya: Part 3 -- Eastern Libya and Oil Grab

After regaining control of the Ras Lanuf and Sidra oil terminals, the Libyan National Army (LNA) laid claim to the terminals and transferred responsibility to an entity based in Benghazi. Previously, responsibility for running the terminals was based in Tripoli via the National Oil Corporation (NOC).

The Government of National Accord (GNA) based in Tripoli responded. Per Aljazeera:

"The oil revenues are sent to the Central Bank of Libya to meet all Libyans' needs, solve crises and manage the affairs of all areas in the country without discrimination," the statement said. 

The eastern-based authorities made a similar attempt to bypass the Tripoli government in April 2016, but their planned sale of 300,000 barrels per day of crude was stopped by the UN Security Council.