Kevin Drum - January 2009

Super Contango

| Wed Jan. 14, 2009 12:27 AM EST

SUPER CONTANGO....Normally, it costs more to buy a barrel of oil for delivery six months from now than it does to buy a barrel of oil today. After all, if you're not going to take delivery of my oil until July, then I'm going to want the spot price of the oil plus the cost of storing it plus the cost of having to wait for my money. So maybe a barrel of oil that costs you $38 today will cost you $41 for delivery six months from now.

But instead of $41, what if the July price is $53? Then anyone who wants to can make a guaranteed killing. Accept the contract, buy a tankerful of oil, store it for six months, and then deliver it. Even after the cost of storage and the interest on the loan you took out to buy the oil, you'll make a quick and easy twelve bucks per barrel profit.

Sounds nice, but since this profit opportunity is so obvious it should get arbitraged away almost instantly. In short, a situation like this should never happen — certainly not for long periods, anyway. But it has:

On Monday, oil for February delivery closed at $37.59 a barrel on the Nymex, or nearly $15 lower than July's contract price....Such a distance between contracts is unusual, sparking industry insiders to term the phenomenon — which reached an apex in late December — "super contango."

When the price spread is greater than the storage cost, "there is an opportunity to arbitrage at a profit without risk," said James Williams, an economist at energy research firm WTRG Economics.

So what's going on? One possible explanation is that most of the easy storage is already full, so it's not really possible to make a quick buck on this even if you want to. But even if that's the case, there's yet another option: oil producers can pump less oil now (essentially "storing" it in the ground) and then pump it out in July for delivery at the higher price. But apparently they're not doing that. John Hempton figures there are two possible explanations: (1) they're already pumping at full capacity, so they can't promise to pump extra oil in July even if they want to, or (2) oil producers are so desperate for cash that they're willing to take money now even if it's way less than they could get for the same stuff six months from now.

#1 doesn't seem to be true. So that leaves #2: thanks to plummeting oil prices, OPEC countries are in serious economic turmoil and desperate for any cash they can get their hands on right now. Either that or else there's an option #3 that's not obvious. Any ideas?

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Deconstructing W

| Tue Jan. 13, 2009 8:12 PM EST

DECONSTRUCTING W....Howard Fineman on Hardball yesterday:

George Bush has never accepted the proposition that the world is complicated.

Me in the Washington Monthly three years ago:

I've long viewed George Bush as a temperamental conservative, the kind of guy you meet in a bar who slams down his drink and asks belligerently, "You know what this country needs?" — and then proceeds to tell you.

I think we're both saying about the same thing. But I was more colorful! In any case, I think this is about the closest I've ever come to describing Bush's essential character. Just thought I'd share.

UPDATE: Matt Yglesias thinks I'm being unfair to drunk guys in bars. Maybe so!

Tuesday Tree Blogging

| Tue Jan. 13, 2009 7:35 PM EST

TUESDAY TREE BLOGGING....The wind was too strong for the tree removers to come yesterday, but today the Santa Anas died down and our Jacaranda is no more. A sad moment, but it had to be done. Tomorrow the roots come out. Your before and after tree blogging is below.

Back on Tracks

| Tue Jan. 13, 2009 5:20 PM EST

BACK ON TRACKS....One of the big problems with our economy in recent years has been the massive growth of the FIRE sector — Finance, Insurance and Real Estate — at the expense of sectors that produce actual useful goods and services. Corporations have spent too much of their time engaged in M&A and stock buybacks instead of investing in new businesses, the savings glut from overseas flowed into the housing and finance market, and either through indolence or inability to attract attention, more traditional industries stagnated. In the current issue of the Washington Monthly, Phil Longman argues that this is roughly what's happened to America's freight railroads. Even though they're cheap, green, and efficient compared to trucks, they're short of track, hobbled by bottlenecks, and unable to haul a fraction of the freight they ought to:

Why don't the railroads just build the new tracks, tunnels, switchyards, and other infrastructure they need? America's major railroad companies are publicly traded companies answerable to often mindless, or predatory, financial Goliaths. While Wall Street was pouring the world's savings into underwriting credit cards and sub-prime mortgages on overvalued tract houses, America's railroads were pleading for the financing they needed to increase their capacity. And for the most part, the answer that came back from Wall Street was no, or worse. CSX, one of the nation's largest railroads, spent much of last year trying to fight off two hedge funds intent on gaining enough control of the company to cut its spending on new track and equipment in order to maximize short-term profits.

....There are many examples around the country where a relatively tiny amount of public investment in rail infrastructure would bring enormous social and economic returns....Chicago, America's rail capital, [] is visited by some 1,200 trains a day. Built in the nineteenth century by noncooperating private companies, lines coming from the East still have no or insufficient connections with those coming from the West. Consequently, thousands of containers on their way elsewhere must be unloaded each day, "rubber-wheeled" across the city's crowded streets by truck, and reloaded onto other trains. It takes forty-eight hours for a container to travel five miles across Chicago, longer than it does to get there from New York. This entire problem could be fixed for just $1.5 billion, with benefits including not just faster shipping times and attendant economic development, but drastically reduced road traffic, energy use, and pollution.

As regular readers know, I have my doubts about pouring lots of money into long-haul passenger rail, high-speed or otherwise, but freight is another story entirely. I don't need much convincing on this score. Trains can haul freight far more cheaply than trucks, both in money and carbon emissions, and an infrastructure overhaul that included electrification would make them more efficient yet. Longman suggests that an investment of $250 billion to $500 billion over the next 20 years would get 85% of all long-haul trucks off the nation's highways, reduce the nation's greenhouse gas emissions by 38% (and oil consumption by 22%), and thanks to logistical efficiencies, would also leave the our economy 13% larger by 2030 than it would otherwise be.

This is a program that would far outlast any short-term stimulus bill, of course, but that's not a bad place to get the whole thing kick started. There are plenty of projects that could begin immediately, and if they're successful then private funding would likely take over much of the burden in the out years. And for those of you who are more enthusiastic about passenger rail than I am, there's another bonus: upgrading the freight infrastructure upgrades the passenger infrastructure at the same time. What's not to like? For more, the whole piece is here.

The Truthiest New Show on Television

| Tue Jan. 13, 2009 2:02 PM EST

THE TRUTHIEST NEW SHOW ON TELEVISION....Over at TNR, Jeffrey Rosen reviews ABC's Homeland Security USA: "Every segment inadvertently reminded us why DHS officers spend so little time protecting the homeland against violent threats: Investigations that begin by looking for terrorists come up short, so officers have no alternative but to snag people for non-violent crimes." Good to know.

Stimulus Math

| Tue Jan. 13, 2009 1:52 PM EST

STIMULUS MATH....Jonathan Stein points me to a Washington Post story telling us that Barack Obama has decided to ditch the $3,000-per-job tax credit that was part of his original stimulus proposal. Good. It was a dumb and almost certainly unworkable idea. But there's also this:

Obama advisers said further adjustments may be made to the president-elect's tax priorities, including to a proposed $500 payroll tax credit for individuals. Many Democrats have criticized Obama's idea of distributing the benefit over 12 months, saying it would amount to about $20 per paycheck for workers who are paid every two weeks. They would prefer to distribute the credit over a shorter period.

I'm basically with Obama here. But I'd actually suggest something different: make the credit bigger, pay it out over two years, and have it automatically decline. For example, how about $2,000 paid out quarterly over two years? The credit would be $400 in the first quarter, $300 in the second and third quarters, and so on until you get down to $100 in the eighth and final quarter. This front loads the stimulus now, when it's most needed, keeps it going throughout the expected length of the recession, and makes it predictable enough that people know they can count on it. It might also strike a good balance between the amount of the stimulus that gets spent vs. the amount that gets saved. Worth a thought, anyway.

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Bush's Mistakes

| Tue Jan. 13, 2009 1:26 PM EST

BUSH'S MISTAKES....Noam Scheiber points to an interesting passage from President Bush's press conference yesterday. The subject is whether he made any mistakes in office:

I believe that running the Social Security idea right after the '04 elections was a mistake. I should have argued for immigration reform. And the reason why is, is that — you know, one of the lessons I learned as governor of Texas, by the way, is legislative branches tend to be risk-adverse. In other words, sometimes legislatures have the tendency to ask, why should I take on a hard task when a crisis is not imminent? And the crisis was not imminent for Social Security as far as many members of Congress was concerned.

As an aside, one thing I proved is that you can actually campaign on the issue and get elected. In other words, I don't believe talking about Social Security is the third rail of American politics. I, matter of fact, think that in the future, not talking about how you intend to fix Social Security is going to be the third rail of American politics.

This is sort of fascinating on a few different levels. First: that Bush somehow thinks immigration reform would have been less contentious than Social Security. In what universe? He may not read blogs, but surely he and Karl Rove were at least dimly aware of what Rush Limbaugh and the dittoheads all thought about this? Is he really this out of touch with the base of his own party? Or does he just not want to admit to himself what that base is really motivated by?

Second: that he thinks he campaigned on the issue of Social Security reform. But in fact he barely mentioned it. One of the very reasons his proposal flopped (though certainly not the biggest reason) is that it came out of the blue. He spent most of the 2004 campaign talking about national security and tax cuts and whatnot, and then as soon as he won he suddenly announced that a massive Social Security overhaul was at the top of his agenda. If he had campaigned on it, he either would have learned quickly what a loser his privatization plan was or else ginned up some support for it. But he didn't.

Third: Bush is still a political animal. His motivation for immigration reform was to lure Hispanics into the GOP fold, as he had successfully done in Texas, and his failure to do that still resonates with him as one of his biggest mistakes. He continues to find it hard to fess up to any kind of real policy errors (cf. Katrina during the same press conference), but he's far more open to taking blame for failures in electoral strategy, which is sort of the game-playing side of being president and head of the party. In the end, apart from his tireless infatuation with being a "war president," I think that's always been the part of the job that animated him more than any other.

Printing Money

| Tue Jan. 13, 2009 12:13 PM EST

PRINTING MONEY....Ben Bernanke says the Fed still has "powerful tools" at its disposal to fight the recession even though interest rates are already down to zero. Felix Salmon is unimpressed:

The natural response to this is simple: if you still have powerful tools at your disposal, why haven't you used them already? And why did you enact that final rate cut to zero, which necessarily comes accompanied by all manner of nasty consequences in the repo markets and at money-market funds? That decision certainly made it seem as though the Fed believes a marginal further reduction in the Fed funds rate is still far more effective than any of its other policies.

If I had to guess, I'd say that Bernanke believes there's a price to be paid for taking extraordinary measures, and it's a price he'd rather not pay unless he absolutely has to. Printing money may be within his authority, but there's no surer way of admitting that literally everything else has failed and you're now on your last legs. I don't blame him for not wanting to go there if there's even the slightest chance he doesn't have to.

Quote of the Day - 01.13.09

| Tue Jan. 13, 2009 11:52 AM EST

QUOTE OF THE DAY....From Peter Schrag, former editorial page editor of the Sacramento Bee, on the California GOP:

With each passing day, Republicans look ever more like a suicidal cult than a political party.

Oddly enough, this really isn't hyperbole. It's a pretty sober statement of consensus reality right now in the Golden State.

Trade Deficits

| Tue Jan. 13, 2009 11:48 AM EST

TRADE DEFICITS....Atrios comments on our financial predicament:

As all good economists "know," one day our trade gap will have to shrink....

I wonder what those scare quotes are supposed to mean? Is it a way of suggesting that the conventional wisdom about trade deficits is wrong? That economists are idiots? Perhaps a comment on the ultimate ineffability of true knowledge? What? Sometimes it's like trying to decipher Peking wall posters over there.