North Sea OIl - the eternal resilience of capitalism.

The Telegraph, 14 April 2015:

Britain's oil industry faces a deep and long-lasting crisis, according to the International Monetary Fund, which said the collapse in oil prices would stifle investment and hit production at a much faster pace than other countries.

Analysis by the IMF and Rystad Energy showed North Sea oil producers would be among the hardest hit by the slump in prices because huge operating costs meant they could not absorb the decline as easily as countries such as Kuwait, Iraq and Saudi Arabia... The fund’s oil industry analysis showed that UK producers faced the highest operating costs in the oil producing world, equating to an average of around $40 per barrel. By comparison, operating costs were less than $5 a barrel in Iraq and Kuwait, and about $6 on average in Russia. The figures will deal a further blow to the Scottish nationalists who have claimed North Sea revenues could help sustain an independent Scotland.

Oil prices have fallen from their June high of $115 a barrel to just $58 today. While this has led to a collapse in the use of oil rigs, most notably among US shale oil producers, the IMF said "significant efficiency gains" in the sector would help to limit falls in production.

CNBC, 16 May 2017:

North Sea oil output is expected to jump by a net 400,000 barrels per day (bpd) or about a fifth in the next two years, defying gloomy forecasts for the oldest deepwater basin that produces the world's benchmark crude price... The region is expected to report its third annual production rise in a row in 2017, reversing years of sliding output...

"The drop in the oil price forced everyone to focus even more than they were on (production) uptime and operating efficiencies which have risen dramatically over the last two years," Premier Chief Executive Tony Durrant told Reuters, "We've been at over 90 percent operating efficiency and a lot of the other players are very high as well. If you roll back to 2012-2013, then the North Sea had a shocking record of about 65 percent," he said.

Mark Thomas, BP's regional president for the North Sea, said in September that BP's cost of production had fallen to about $16 or $17 a barrel from above $30 in 2014.

For sure, there is a lot more to this than meets the eye and I have quoted selectively, but you get the general idea.

IMF: getting it arse backwards yet again.

From The Guardian:

The International Monetary Fund has slashed its forecast for UK growth next year after warning that the decision to leave the EU has damaged the British economy’s short-term prospects and “thrown a spanner in the works” of the global recovery…

Oh noes! Sticking with Project Fear. So what does the IMF suggest?

Policymakers in the UK and the rest of the EU have a vital role to play in reducing uncertainty, the IMF said. “Of primary importance is a smooth and predictable transition to a new set of post-exit trading and financial relationships that as much as possible preserves gains from trade between the UK and the EU.”

Well, duh.

That's what everybody wants, Leavers and Remainers alike. Mainstream opinion here appears to be that we are quite happy to remain in the tariff-free Single Market in both directions, it's just that - for whatever reason - we don't like unrestricted free movement of people from certain EU member states, and quite understandably don't like chipping in £12 billion a year for Eurocrats and subsidies for  agricultural landowners in other EU member states (insanely, the pol's are happy to subsidise UK farm land owners, many of whom are not UK resident, of course…)

It's only the top bods at the EU and the French who want to teach us a lesson and throw a spanner in the works. So go and have a chat with them, eh?

Nobody move or your country's credit rating gets it!

Left in the comments by PaulC156, from The Telegraph:

If the International Monetary Fund and its co-conspirators in the Treasury wish to deter undecided voters from flirting with Brexit, they have certainly failed in my case...

The Fund gives the game away in point 8 of its Article IV conclusion on the UK economy. It states that “the cost of insuring against a UK sovereign default has doubled (albeit from a low level)”. Any normal person who does not follow the derivatives markets would interpret this as a grim warning from global investors.

Yes, the price of credit default swaps on 5-year UK debt – the proxy we all use - has jumped from 17 to 37 since late last year. But the IMF neglected to mention that it has risen from 15 to 33 in Switzerland, from 26 to 43 in France, and from 45 to 65 in Korea.

The jump has almost nothing to do with Brexit, and the IMF knows this perfectly well. The French have an expression that will be familiar to the IMF’s Christine Lagarde: ils font feu de tout bois [they are firing on all cylinders].

'Nuff said.

Nobody move or house prices and share prices get it!

Today's scaremongering from the FT, via MBK (as usual):

A vote by the UK to leave the European Union risked triggering “sharp drops in equity and house prices, the head of the International Monetary Fund has warned in a damning assessment of the effects of Brexit.

Christine Lagarde, IMF chief, warned the consequences of Brexit ranged from “pretty bad to very, very bad”, precipitating a protracted period of heightened uncertainty, financial market volatility and a hit to economy.

Appealing to the Home-Owner-Ists is always a good strategy, but actually those are the two least important variables in the economy, they are just a measurement of other much more fundamental things, they are a symptom and not a cause. So output, profits and employment matter - share prices do not.

Moreover, they are just transfers of wealth, if house or share prices fall, tomorrow's purchasers benefit by in £££ the same amount that today's owners have lost on paper.

What a load of Cobblers

Here, I quote:

"IMF Report: Brexit risks 'severe and permanent damage' to the world economy."

That really is the most stupid headline I have read for a long time. Patently it is absolute nonsense.

Did the 1930's depression create 'severe and permanent damage to the world economy'? No.

Did the rampant inflation of the Weimar Republic and (arguably) the consequential rise of Hitler create 'severe and permanent damage to the world economy'? No.

Did WW2 create 'severe and permanent damage to the world economy'? No.

Did the collapse of the Soviet Empire create 'severe and permanent damage to the world economy'? No.

Did the American Revolution (and its 'AMEXIT' from the first British Empire) create 'severe and permanent damage to the world economy'? No. In fact arguably the exact reverse. AMEXIT, together with implementing the recommendations of The Wealth of Nations (published at the same time - 1776), laissez faire and the repeal the Corn Laws ushering in an extended period of free trade, set the world on the greatest period of wealth creation (for everyone) in history, so far.

The IMF are liars. End of.

Free markets or subsidy junkies?

From Business Insider:

European markets rocketed upwards today on some sudden and positive hints of a Greek bailout deal at today's emergency European summit.

The Greek government is trying to negotiate a billions of euros in bailout money, and for the first time in weeks there are genuine signs of positive developments today. Athens stocks led the way — the index recorded a dramatic rise of 9% on Monday...

And so on and so forth.

So basically, share prices depend to a large extent on the continuation of the massive subsidies which somehow trickle their way from ordinary taxpayers and ordinary bank customers, via the Greek government and ultimately back to various large European banks (for whose benefit this whole show is being organised).

So while the stock exchange as such is a free market (anybody can buy or sell), a large part of what is being bought and sold is corporatist welfare.

Reader's Letter Of The Day

I was drafting a post in my head in response to an article in this morning's Metro reporting that the IMF said that the pace of cuts should be slowed down to protect the economy (or words to that effect), but this reader's letter from the FT has saved me the bother:

Sir, Chris Giles points out that if the multiplier of government spending is greater than 1.0, the impact of fiscal austerity is economic contraction (“IMF forecast leaves chancellor in a fix”, October 10).

The implication is that government spending enjoys a uniform multiplier. Surely, the multiplier varies depending on the type of spending? Furthermore, some spending is more likely to end up as value added tax, personal or corporate tax than other spending.

Therefore, is there not any fine-tuning to be done when implementing fiscal austerity whereby, ceteris paribus, low multiplier spending should be cut before high multiplier spending and the best spending is that which enjoys a high multiplier and ends up as taxable income? Applying this level of fine-tuning may bring the UK back to perhaps zero growth from a current estimate of minus 0.6 per cent without adding to the deficit.

Jonty Crossick, London E1.

That's the whole point isn't it?

i. It's best to view "the government" as a collectively owned service provider, i.e. just another type of business, and start by looking at the benefit we get for each £1 spent. So it makes sense for a supermarket to replace the flooring in the retail areas every ten years, but it makes no sense to replace it in every warehouse every six months, and so on.

ii. If we start at the most basic level, the £20 billion we spend each year on police and prisons pays for itself a hundred times over, without this everything else would fall apart. The £10 billion we spend on road maintenance and the £5 billion we spend on refuse collection or street cleaning pay for themselves dozens of times over, regardless of how they are paid for.

iii. As per usual, the best way of recovering the costs of these core functions is by charging for the corresponding increase in land rental values, and that is also the best way of identifying spending which passes his simple test: "the best spending is that which enjoys a high multiplier and ends up as taxable [rental values]".

iv. Sure, you can argue that there is waste in the police and prisons budget; that the police sometimes focus on the wrong sort of crimes; that there are some people in prison who are innocent or who ought not be there (all of this is true, although we do not know the precise degree); or that local councils don't always get the best deal with refuse collection companies (on the facts, I think they do) etc etc, these are separate topics.

v. At the other extreme is the one or two hundred billion spent/wasted each year on subsidies to banks; fakecharities; corporatists like welfare-to-work providers, windmill installers, MoD overspend, PFI projects; money paid to the EU, the UN; most third world aid, and so on.

vi. The taxpayer generally simply doesn't get any benefit or value for money for these things, and it is mathematically impossible for anything but a small fraction of this to come back as higher tax revenues. It's also highly unlikely that this type of spending boosts the rental value of land.

vii. And there are plenty of types of spending in between the two extremes, in particular transfer payments like welfare and pensions, which you could argue is not spending but negative taxation or, from a Georgist point of view, this is the dividend that each citizen gets in his capacity as co-owner of a mutual service provider and is thus not "spending" at all, in the same sense as police, prisons, roads, refuse collection definitely is spending. Some things, in particular education, are clearly of overall net benefit (up to a certain age - 14? 16? 18? who knows?) but I believe that standards would be improved if parents were given taxpayer-funded vouchers to spend as they wish. And some things, like the NHS are more akin to a low-cost mass insurance scheme.

viii. Some of these hundreds of things are of net benefit and some aren't, but as these things are difficult to measure precisely, personal opinion seems to take over and stifle any sort of sensible debate. But surely, it is idiotic to argue that the £ benefit for every £1 the government spends is the same, and that there is always a net benefit (just as idiotic as arguing there is always a net loss), regardless of what the government is spending it on?

More wilful misreporting of Greek bail out

by The Metro:

After more than 12 hours of gruelling talks, eurozone ministers agreed a £200billion rescue deal that would save the country from bankruptcy.*

As part of the plan, £90billion of debt will be wiped out and interest rates on loans will be slashed. A further £108billion will also be loaned to the country to help it get back on its feet.

In exchange, Greece has agreed to cut pay, public sector jobs and spending as well as find £270 million of savings** in this year’s national budget. Next month, the IMF will decide how much to contribute to the package but if it is the same as last time, Britain could be made to hand over £1.6 billion***.

Nope, you cannot add £90 billion to £108 billion; you have to deduct £108 billion from £200 billion to arrive at the real answer +/- £90 billion, which is the value of debts from which Greece has been released.

What happened was that the EU/ECB/IMF gave existing existing creditors (who were owed £200 billion) £108 billion and told them to clear off, so now Greece owes the EU/ECB/IMF £108 billion instead of owing the existing creditors £200 billion.

* Countries can't and don't go bankrupt. They either default or are subsumed into a larger country, by consent or by force.

** To put £270 million into perspective, Greece's population and GDP are approx. one-fifth of the UK's, in other words, £270 million in their terms is £1.4 billion in our terms, i.e. still peanuts.

*** We will, hopefully, get most of that £1.6 billion back, sooner or later, as it is a loan not a gift; further, the chances are that this £1.6 billion will end up being paid to UK banks anyway. So this is not A Good Thing but it is hardly A Disaster, given the scale of UK bank bail outs so far.

OECD, IMF on top form

From International Business Journal:

The Organization for Economic Co-operation and Development released a report on Tuesday calling on Germany to raise its property taxes dramatically and reduce taxes on labor. The group, whose membership is made up of 34 of the world's leading market economies, also made similar recommendations for Denmark, Norway and the UK over the past month.

For Germany, the organization recommended tripling its property taxes, while reducing its wage taxes and social security contributions, which currently make up 64 percent of total tax revenue, compared with the OECD average of 52 percent, according to the German language Immobilien Zeitung. Property taxes, meanwhile, amount to only 1 percent of total revenue collected, against an OECD average of 3 percent*. The group also called on Germany to reform its assessment mechanisms, as many properties are valued far below their true market worth...

The International Monetary Fund also made a similar recommendation to Norway this month...

The OECD has been a strong proponent recently of land value taxes, which date back to Adam Smith but were most vigorously promoted by 19th century economist Henry George. He promoted a land value tax—which is assessed on the unimproved value of underlying land, not penalizing intensive development like many property taxes today—as a replacement for all tariffs and levies, however the OECD has settled on a more moderate position, instead advocating a shift in emphasis away from other taxes and towards the land value tax.

Land value taxes can be tricky because of practical difficulties in estimating a plot's value, especially if it is a unique piece of land, or if land parcels like it do not change hands very often. Newer computer-assisted methods of land appraisal have made this job easier, though, and many countries around the world have adopted the tax.

The responses..?

The two groups' advice, however, was rebuffed by Norway's minister of finance, Sigbjorn Johnsen, who said at the press conference on Wednesday: "I have no plans to increase housing taxes."**

Denmark was subject to the same advice last month, with the Nordic Labour Journal reporting that the OECD advised the country to cut income taxes and increase property taxes. The Danish government plans to incorporate some of the OECD's recommendations into its 2012 tax reform, but a property tax hike will not be on the table. As the NLJ writes, "[t]his is because property taxes were ring-fenced in the coalition agreement covering this parliamentary term."

* In the UK, we have a quasi-Land Value Tax on commercial land and buildings (called 'Business Rates') which alone raises over 4% of total government revenues; we also have Council Tax on residential land and buildings, which is a mixture or Poll Tax and a modest property value tax, which raises another 3.5%.

** That'll be no surprise to Kj, I guess.

Γιώργος Παπανδρέου

Bloody Hell, that was quick...

From The Telegraph:

"Slovakia's lawmakers have rejected a revamp of the eurozone's European Financial Stability Facility (EFSF) rescue fund* in a crunch vote..."

Splendid news, so what happens next..?

"... that also toppled the country's centre-right government which had staked its future on the motion."

Aha, so that's how it works. Fail to nod through what the EU wants, and your government falls. See also: try to push through a tax on mineral extraction rights (for the benefit of the whole economy) and you'll lose your job as Prime Minister; your successor will then water the tax down to very little indeed.

* If I understand these matters correctly, what the Slovak Parliament actually did was to refuse to ratify a change to the EU Treaty (aka Constitution). As Denis Cooper explained it to me, to cut a long story, the EFSF has no legal base in the EU treaties anyway, and its proposed permanent successor the ESM cannot be set up until the EU Treaty is amended (which requires UK consent). Our MPs (or for that matter, Slovak MPs) could stop the ESM coming into force by blocking the forthcoming Bill to approve the amendment (as proposed by Decision 2011/199/EU). With that EU treaty change killed off, it couldn't be used for any other purposes, including agreeing to a Tobin tax in the eurozone (or imposing it on UK banks, for that matter).
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UPDATE: ignore that last paragraph, the Slovaks were indeed voting on a different amendment to the whole EFSF mechanism, and it's only Euro-zone countries which get to vote on this. That doesn't affect the fact that the whole ESM/EFSF is quite illegal under the EU treaty, and all EU Member States (including UK and other non-Euro- zone countries) have to ratify this.

The European Stability Mechanism

Denis Cooper has summarised something rather complicated. It's still rather long but worth a read, the sting is in the tail:

On March 25th EU leaders agreed on a radical amendment to the EU treaties through European Council Decision 2011/199/EU. Over the past five months the UK media have hardly even mentioned that this treaty change has already been agreed, let alone discussed its potential implications. The nature of the amendment is that of a licence which the 27 EU member states as a whole would grant to a class of EU member states, the (now) 17 EU member states in the eurozone.

The fact that it is considered necessary to change the EU treaties so that henceforth the "The Member States whose currency is the euro may establish a stability mechanism ..." confirms that the stability mechanism they have already established, the European Financial Stability Facility or EFSF lacks any legal base in the present EU treaties.

And bearing in mind that Christine Lagarde, then French Finance Minister and now head of the IMF, described the actions of EU political leaders on May 9th 2010 as "major transgressions" of the present EU treaties, which are "very straightforward - no bailing out", clearly a treaty change to legitimise similar actions in the future must be seen as a major treaty change which should be the subject of significant public debate across the EU, including in the UK. The eurozone states are already proceeding to make use of their new licence, even before it has come into force, through a Treaty establishing the European Stability Mechanism which they signed on July 11th.

While few people in the UK have noticed this development it has attracted the critical attention of the economist and commentator Dr Oliver Marc Hartwich, a German and a former Londoner now resident in Australia. In a Business Spectator article entitled A poisoned chalice of EU power he writes scathingly:

“The ongoing assault on the basic rules of liberal democracy has been the defining feature of the euro crisis. The treaty to establish the new European Stability Mechanism is the best example of this fundamentally undemocratic approach … it may be European but legally it stands outside the EU. This means that the EU can formally keep its commitment to the Lisbon Treaty’s ‘no bail-out clause’ though the ESM will provide just that …

"If the ESM has thus turned parliaments into mere cash machines, will it at least be transparent and accountable? Provisions about legal privileges granted to the ESM suggest otherwise … European governments do not have the slightest interest in a thorough debate about the introduction of the ESM. They cannot risk the public understanding what this ESM treaty really is: an enabling act that undermines budget rights of parliaments; a coup d’état of the continent’s political leadership against their peoples; and the most costly piece of legislation ever put before European lawmakers. It would be crazy to explain to ordinary Europeans what their political leaders have conspired to introduce. And so they don’t."

From a British point of view, it is crucial to understand that because intra-eurozone treaties such as this would be allowed by the EU treaties as amended by Decision 2011/199/EU, but would legally stand outside the EU, it should not be assumed that integrationist measures such as "eurobonds" or a "fiscal union" or a "transfer union" would require any further changes to the EU treaties, provided that such measures were confined to the eurozone and ostensibly at least would not apply to the rest of the EU.

Therefore if anybody is fondly hoping that the need for further EU treaty changes would give the UK government a splendid opportunity to extract concessions and repatriate powers in exchange for its agreement, they would be sorely disappointed. Just as the UK is not a party to this first intra-eurozone treaty so it would not be a party to subsequent intra-eurozone treaties – unless and until the UK joined the euro - and therefore the UK government would have no veto to exercise over changes to those intra-eurozone treaties, and so no leverage for extracting concessions from the EU, even if it was disposed to do so.

All this depends on the eurozone states being granted their licence by the final ratification of the EU treaty amendment embodied in European Council Decision 2011/199/EU, and in the case of the UK that will require parliamentary approval through an Act. Is it too much to ask that our MPs will stop and think hard about the long term implications of giving their approval of that Decision, rather than just nodding it through?

No wonder he Kahn't stop smiling

My Big Fat Greek Finance Minister

Buddy, can you spare me a Euro? Well, about a hundred billion, actually...

IMF Fun

Timeline:

1. IMF Managing Director Strauss Kahn is caught with his straussers down.

2. The UK's "Chancellor of the Exchequer" (that's Finance Minister, in plainspeak) George Osborne recommends yet another French politician for the job as IMF Managing Director (Directrix?).

3. IMF says no changes are needed to UK economic policy*.

* UK economic policy appear to consist of artificially low interest rates, high inflation, increases in the tax burden on the productive economy, a yawning budget deficit and - to top it all - cuts to front line services. Go figure.

Caught with his Straussers down

Fun Online Polls: Irish bail out and traffic lights

On a good turnout (thanks to everybody who took part) of 136 people, the results to last week's Fun Online Poll (multiple votes allowed) were as follows:

What sort of success will the new Irish government have in renegotiating the terms of the EU-IMF bail out?

None whatsoever - 54 votes
Some minor window dressing - 63 votes
The repayment period will be extended - 11 votes
The interest rate will be reduced - 6 votes
Bond holders will bear more of the losses - 8 votes
Other, please specify - 4 votes

Ooh you bunch of cynics! I reckoned that the EU-IMF would at least extend the repayment period, which reduces the annual instalments but increases the overall amount to be repaid, in which case they might even reduce the nominal interest rate a bit to even things out. But we'll see fairly shortly.
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This week's poll is nice and simple. I am trying to work out how much traffic lights cost the economy. The largest single item on the list is the value of the time wasted while stuck in the queue at traffic lights, so I'd be grateful if everybody could give me an estimate of how many minutes they waste in total on a normal week day.

Vote here or use the widget in the sidebar.

It's like pumping more air into a balloon that has burst...

Reuters, 3 May 2010:

Markets reacted skeptically on Monday to a record 110 billion euro ($145 billion) bailout for Greece, with investors doubting it would offer more than temporary relief to a euro zone shaken by divisions and saddled with high debt.

Despite Sunday's agreement by European finance ministers on an unprecedented three-year loan package, the euro fell as markets questioned the ability of the Greek government to push through new austerity measures pledged in exchange for aid and worried other euro states may be vulnerable.

FT, 22 November 2010:

Jens Larsen, chief European economist at RBC Capital Markets, said: “The market reaction [to the Irish bail out] tells us that the eurozone debt crisis is far from over. The market is unsure of how events will unfold, which explains the muted reaction today.”

... Using Greece as an example again, the omens are not good. Greek bond yields fell from a peak of 12.45 per cent to 7.24 per cent within days of the shock and awe announcement. But they have steadily risen since and are now trading near their peak, at 11.69 per cent.

Of course, we don't know what interest rate Greece would be paying in the absence of a bail-out, the Big Unknown being whether they would have left the Euro-zone or not, but hey.

Fun Online Polls: Wills and Kate; EU-bailouts

With a very good turnout (thanks to everybody who took part), the response to last week's Fun Online Poll Wills and Kate have decided to get married: what do you think? was as follows:

So what? 67%
Who are "Wills and Kate"? 21%
It is a great moment for national celebration! 12%

It seems that we're swimming against the tide on this one, as most of the newspapers devote at least a page every day to the topic, which usually include a brief explanation of who "Wills and Kate" actually are, to wit, a celebrity jobless couple from the South of England.
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The EU 'bailed out' Greece in February of this year, which was supposed to sort out 'financial instability in the Euro-zone' once and for all. It didn't of course, because the banks then go hunting for the next easy target, do a bit of rumour-mongering and short-selling, make a nice profit on the way down and then go running to the EU or the IMF for a bail out.

So next on the list was Ireland/Irish banks (the two are now more or less synonymous), who were successfully cajoled into accepting a bail out at the weekend.

These patterns tend to repeat themselves, I just wonder how good are we at recognising them? So that's the topic for this week's Fun Online Poll: "Which country will the EU 'bail out' next?"

FWIW, my money is on Portugal, as it is easier to bully small countries, even though logic says that Spain are in a bigger mess, relatively, having had a far larger land price bubble. If they try this with Italy, the banks might find that they have bitten off more than they can chew, and there must come a stage where we realise that the European Central Bank emperor is not wearing any clothes.

Vote here or use the widget in the sidebar.