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What’s Behind The Canadian Rig Count Crash

Authored by Nick Cunningham via OilPrice.com,

The U.S. rig count has been on the rise for months, despite some recent hiccups, but Canada’s rig count recently plunged amid low oil prices.

Canada’s rig count fell from 210 to 136 for the week ending on December 29, a massive drop off. That took the rig count to a six-month low. Obviously, the losses were concentrated in Alberta, where most of the rigs tend to be. Alberta’s rig count sank from 162 to 118 in the last week of 2017. But Saskatchewan also saw its rig count decimated—falling from 43 in mid-December to just three at the close of the year.

 

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The losses can likely be chalked up to the meltdown in prices for Canadian oil. Western Canada Select (WCS), a benchmark that tracks heavy oil in Canada, often trades at a significant discount to oil prices in the United States. But the WCS-WTI discount became unusually large in November and December for a variety of reasons. The outage at the Keystone pipeline led to a rapid buildup in oil inventories in Canada, and storage hit a record high in December.

Also, Canada’s oil industry has been unable to build new pipelines to get the landlocked oil from Alberta to market. Alberta oil producers are essentially hostage to their buyers in the U.S., and with oil production now bumping up against a ceiling in terms of pipeline capacity, the glut is starting to weigh on WCS prices.

 

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In December, Enbridge announced that it will ration the space on its Mainline oil pipeline system for January as Canada’s pipelines are essentially at full capacity. Enbridge said that it will apportion lines 4 and 67, which move heavy crude, by 36 percent. The term “apportionment” is a euphemism for rationing—essentially oil producers are unable to get all of their product onto the pipeline and are hit with restrictions. That means the oil has to be diverted into storage.

In short, there’s somewhat of a glut of supply in Canada right now. The problem is that there’s little prospect of a solution in the near-term. Railroads, although they are taking incrementally more cargoes, cannot handle the excess supply all on their own, especially with new supply coming online. And there are no serious pipeline capacity additions expected for about two years at the earliest. The three main proposals—Kinder Morgan’s Trans Mountain Expansion; TransCanada’s Keystone XL; and Enbridge’s Line 3 replacement—all face legal questions and uncertain completion dates.

On top of that, Canada’s oil sands producers are adding new supply. At today’s prices, it makes little sense to greenlight new upstream projects, particularly in expensive oil sands. But there are still some projects that are finishing up that were given the go-ahead years ago when oil prices were substantially higher. Suncor Energy is set to bring its Fort Hills project online, which will add nearly 200,000 bpd of new supply within 12 months.

That all means that the pressure on WCS probably won’t go away. The price meltdown from two months ago is probably now showing up in the rig count. The U.S. typically sees the rig count fluctuate in response to changes in the oil price by several months, and the rig count in Canada will only now start to reflect the price plunge from months ago. The rail industry might handle more oil cargoes, which could help push up WCS a bit, but the larger-than-usual discount might persist for some time.

Canada could add new refining capacity to process all of that oil right at home, an option that is often raised when WCS prices tank. IHS Markit recently studied several scenarios for Canada’s oil industry, including upgrading existing refineries to process heavy oil into a lighter synthetic form of oil, as well as building entirely new refineries. IHS Markit concluded that there is an opportunity to convert existing refineries, but that the abundance of light oil supply in North America could challenge the economics. New refining capacity is a risk. In any event, refined products and lighter oil would still need to be exported via pipeline.

In short, Canada’s oil industry faces more obstacles than, say, the much-watched shale drillers in the United States. The U.S. rig count is closely tracked around the world for clues into what happens next in the oil market—an increase is assumed to mean that more U.S. shale supply will be forthcoming while a decrease is a sign of market tightness and potentially higher prices. The publication of this weekly data has global implications.

Canada’s rig count, on the other hand, could continue to struggle even as U.S. shale drillers spring into action in response to higher prices. Canadian producers won’t benefit as much from the upswing in the global market due to their local and regional problems, mostly related to the lack of pipeline capacity.

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What Is Hate Speech? We Asked College Students: New at Reason

What do you think of when you hear the term “hate speech”? For many, it conjures images of torch-wielding mobs in Charlottesville or right-wing provocateurs like Milo Yiannopoulos. For some, such conduct seems reprehensible enough to merit government regulation.

But it turns out that defining “hate speech” isn’t as easy as pointing to extreme examples of bigotry and racism.

In the United States, the First Amendment grants absolute protection of even the most vile speech, as long as it doesn’t directly incite violence. There is no special legal treatment of hateful words. But the tide may be turning. 40 percent of Americans now believe the government should regulate so-called “hate speech.”

Many developed countries, including Canada and much of Europe, have passed laws that criminalize certain speech deemed hateful. France has prosecuted comedians for Facebook posts, the U.K. has imprisoned people for offensive tweets, and Germany threatened to prosecute a comic over a poem about Turkish leader Recep Tayyip Erdogan.

Social media examples have also demonstrated how speech codes often backfire and hurt the very minorities they are intended to protect. Though Facebook and Twitter are private companies free to ban whatever they like on their platforms, their attempts to control hateful speech have resulted in bans of feminists for saying that “all men are trash,” and rapper Lil B was suspended for posting “White people are the only ones who really love they guns U can tell they are violent people!”

College campuses have become the epicenter of the free speech debate, with incidents of college students shouting down and even physically attacking controversial speakers becoming increasingly common in recent years. So we headed to the University of Southern California to see if students there could define “hate speech” for us, and whether they thought it should be outlawed.

Many who desired government intervention were motivated by what they see as the rise in hateful rhetoric associated with Trumpism and the far right. But does it make sense to give the government more control over speech, when the government is run by people like Donald Trump?

Can speech ever be violence? Is bigotry and ignorance best countered via the free exchange of ideas or the criminal justice system? Do universities have more of an obligation to let students be challenged and possibly offended, or to protect them from “harmful” or “hateful” ideas?

We found opinions on campus that ran the gamut.

Produced by Zach Weissmueller and Justin Monticello. Hosted by Monticello. Edited by Weissmueller. Camera by Weissmueller and Monticello. Graphics by Brett Raney. Music by Elvis Herod.

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Russia Slams US “Attempts To Interfere” In Iran After Macron Warns Of “Conflict Of Extreme Brutality”

Russia has joined China in calling for a policy of non-interference in Iran’s domestic affairs after a week of unrest has gripped multiple major cities and towns across the country in what started as protests over economic grievances, but which have since increasingly turned to riots and calls for President Rouhani and the clerical regime to step down, resulting in the deaths of at least 22 people, including at least one police officer who was shot dead.

In remarks given to Russia’s TASS news agency Russian Deputy Foreign Minister Sergey Ryabkov expressly warned the US “against attempts to interfere in the internal affairs of the Islamic Republic of Iran,” while stressing, “What is happening there is an internal affair, which attracts the attention of the international community.” Russia’s stance is similar to that of China’s voiced previously on Tuesday. When asked about the Iran protests at a regularly scheduled press conference, China’s foreign ministry spokesperson Geng Shuang simply gave a one-sentence answer, saying, “China hopes that Iran can maintain stability and achieve development.”

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Image source: Reuters via al Monitor

Both Russia and China – permanent members of the UN Security Council – have already signed deals worth billions to develop sectors related to travel, energy, and infrastructure, soon after international sanctions were lifted in January 2016 as part of the 2015 nuclear deal brokered by the United Kingdom, United States, France, Russia, China, and Germany. Last August Russia and Iran signed a $2.5 billion deal to jump start the rebuilding of Iran’s ailing rail lines. Forbes described Iran as poised for an “infrastructure building bonanza” at a moment when trade with Russia doubled over the course of 2016, which has included the sale of military equipment such as helicopters and various rocket systems, and has also seen Russian oil and gas giants such as Gazprom quickly move into Iran. Both countries have also cooperated militarily in Syria since Russia’s entry into the war at the invitation of the Assad government in 2015. 

As we’ve previously noted, Western firms have been reluctant to invest heavily in Iran with the ever looming possibility of new US sanctions under the Trump administration – a concern now greatly compounded after a week of internal protests in the country considered a longtime enemy especially of both the US and Israel.

In mentioning the overblown and premature attraction of “the attention of the international community” Ryabkov appears to be referencing recent statements issued by Israeli Prime Minister Benjamin Netanyahu and President Trump, among others. On Wednesday Trump tweeted an ambiguously threatening message, stating, “Such respect for the people of Iran as they try to take back their corrupt government. You will see great support from the United States at the appropriate time!” This came after the State Department issued an official statement at the end of last week which explicitly mentioned “transition of government in Iran.” The statement expressed US support for protesters, and further referenced “those elements inside of Iran that would lead to a peaceful transition of government. Those elements are there, certainly as we know.” 

Though Trump didn’t explain what was meant by “great support” this could mean any one or more scenarios involving new sanctions, lobbying the UN to condemn Tehran authorities, threatening military action, or giving official or covert support to opposition factions both in exile and on the ground. Trump’s most recent Iran tweet followed an equally inflammatory declaration that, “Iran is failing at every level despite the terrible deal made with them by the Obama Administration. The great Iranian people have been repressed for many years. They are hungry for food & for freedom. Along with human rights, the wealth of Iran is being looted. TIME FOR CHANGE!” Vice President Pence has also weighed in. He stated Wednesday after penning a Washington Post op-ed pledging support to the people of Iran, “Today, the Iranian people are once again rising up to demand freedom and opportunity, and under President Trump, the United States is standing with them. This time, we will not be silent.” 

Russian Deputy FM Ryabkov’s response touched on the Iran deal in relation to the heightened international rhetoric. He stated, “However, despite numerous attempts to distort the essence of what is going on, I am certain that our neighbor, the country that is friendly to us, will be able to overcome the current difficulties and emerge from the current period as a stronger country and a reliable partner in solving various problems, including those related to the further implementation of the Joint Comprehensive Plan of Action (JCPOA).”

“All the terms, timeframes and frameworks that were set in the JCPOA were the result of very difficult and very lengthy negotiations,” the senior diplomat further explained, recalling what Russia sees as recent US maneuvers to undermine the deal. “Therefore, taking out of the package arbitrarily only what suits the Americans and demanding amending those provisions, which, for some reasons that are unknown to us, do not suit the Americans is a destructive approach. It can undermine the agreement reached with difficulty.”

Ryabkov also accused the US of intentionally using the current Iran unrest to try to undermine the sustainability of the JCPOA, charging, “The current situation when Washington yields to temptation to take advantage of the moment to bring up new questions with regard to the JCPOA testifies to a deliberate attempt to undermine the global community’s commitment to the JCPOA. That does no credit to our American counterparts.”

On Monday, Israeli PM Netanyahu delivered a televised message directed at Iran via YouTube wishing “the Iranian people success in their noble quest for freedom” – this after authorities in Tehran accused protest leaders of serving the interests of and being in league with foreign “enemies” like Saudi Arabia and Israel.

“I heard today Iran’s President Rouhani’s claim that Israel is behind the protests in Iran,” said Netanyahu in the video. “It’s not only false. It’s laughable – unlike Rouhani, I will not insult the Iranian people. Brave Iranians are pouring into the streets. They seek freedom. They seek justice. The seek the basic liberties that have been denied to them for decades.” Both Trump and Netanyahu’s statements have possibly given Iran greater reason to fear that internal unrest could gain momentum through being supported by outside forces – though new reports suggest that popular protests could be dying down. 

* * *

Meanwhile Iran responded to US statements in a formal letter to the United Nations, slamming Trump’s “absurd tweets” and complaining that Washington is intervening “in a grotesque way in Iran’s internal affairs” while accusing Trump and Pence of personally stirring up trouble and inciting “Iranians to engage in disruptive acts.” The letter to UN officials by Iranian Ambassador Gholamali Khoshroo further charged that the US leaders have “crossed every limit in flouting rules and principles of international law governing the civilized conduct of international relations.”

And it appears that Iran has at least one Western voice of support to its argument that rhetoric from the US and its allies is unnecessarily and dangerously ratcheting up the situation. On Wednesday’s France’s President Emmanuel Macron blasted statements from Washington and Israel, telling reporters, “The official line pursued by the United States, Israel and Saudi Arabia, who are our allies in many ways, is almost one that would lead us to war.” He charged that some countries seemed to be engaged in a “deliberate strategy” to undermine the JCPOA. 

“Otherwise, we end up surreptitiously rebuilding an ‘axis of evil’,” Macron said in reference to an infamous phrase by former President George W. Bush, who used the phrase to describe countries including Iran, Iraq and North Korea. Macron further warned of going down a path of a “conflict of extreme brutality” should US pressures on Iran continue. 

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Trump Kills Incompetent ‘Election Integrity’ Commission, But His Voter Fraud Conspiracy Theory Lives on

Get 'im next time, little buddy! ||| Sipa USA/TNS/NewscomLast night, in an unexpected announcement, President Donald Trump dissolved his Presidential Advisory Commission on Election Integrity, which had been assembled in March to add investigatory heft to the president’s factually ludicrous claim that between three million and five million people voted illegally for Hillary Clinton in 2016. The commission, operationally managed by vice chair Kris Kobach, who as Kansas Secretary of State has emerged as the nation’s leading elected voter-fraud conspiracist, had been riddled from the start by a lack of transparency, brazen attempts to create a national voter database out of compelled state data, and lawsuits from its own members. Over at The Volokh Conspiracy, Ilya Somin spells out in detail how its demise marks “a victory for federalism.”

But not quite a victory for rationality. The White House’s brief statement begins with the defiant sentence, “Despite substantial evidence of voter fraud, many states have refused to provide the Presidential Advisory Commission on Election Integrity with basic information relevant to its inquiry.” This even though Kovach, in his capacity as the official in charge of overseeing elections in Kansas, has prosecuted just nine illegal voters, eight of whom (according to Mother Jones) “were citizens who voted in two different states, and most of them were over 60 years old, owned property in both places, and were confused about voting requirements.”

The president this morning made a Kinsley gaffe in his tweetsplanation of the decision:

When the purpose of your commission is to root out a partisan conception of voter fraud, rather than the titular and theoretically bipartisan goal of election integrity, choosing a hack like Kobach makes sense. An advisory body seeking to live up to its actual name would better be composed of officials and specialists with respect on both sides of the aisle (and hopefully among those many on the outside of the two-party system), while focusing on all aspects of potential integrity violations, not just the most popular claim on one side.

So does this mark the end of the administration’s exertions on the issue? No. Trump “has asked the Department of Homeland Security to review its initial findings and determine next courses of action,” whatever that means. And his habit of foregrounding partisan electoral math in personnel and policy decisions involving nonpartisan bodies has also taken expression in the potentially influential location of…the Census Bureau.

The Department of Justice last month officially requested that the Census Bureau include in its decennial questionnaire for the first time since 1950 whether respondents are citizens of the United States, arguing that the information is necessary “to fully enforce” the Voting Rights Act. (The bureau does ask about citizenship in its annual American Community Survey, which is conducted on a sample basis, and has little comparative impact.) “This is a recipe for sabotaging the census,” Arturo Vargas, a member of the Census Bureau’s National Advisory Committee on Racial, Ethnic, and Other Populations, alleged to ProPublica.

Critics warn that the question, coupled with the Trump administration’s increased deportations (and threats thereof) of illegal immigrants, will lead to an undercounting of households, neighborhoods, and populations with higher proportions of undocumented residents. This in turn would change the composition of the House of Representatives, and the way legislative districts are drawn. One way to assuage such suspicions would be to appoint a 2020 Census overseer with an academic and/or civil-service pedigree far removed from the scrum of bare-knuckle politics. President Trump, according to six weeks of reporting, has chosen a second path.

NTTAWWT ||| AmazonTrump’s pick for deputy director (and operational executive) of the Census Bureau is reportedly set to be Thomas Brunell, author of the 2008 book, Redistricting and Representation: Why Competitive Elections Are Bad for America. Brunell’s main professional focus vis-à-vis measuring populations has been to argue on behalf of the Republican Party that legislative districts be drawn up to more heavily concentrate partisan and ethnic/racial groupings. Mother Jones takes a jaundiced tour through Brunell’s work, and outraged reactions to his appointment, here, including:

Democrats in Congress have also raised concerns about Brunell’s appointment. (The deputy director position does not require Senate confirmation.) “Dr. Brunell has neither the managerial experience nor the non-partisan reputation to fill this position,” Sens. Kamala Harris (D-Calif.) and Gary Peters (D-Mich.) wrote to Commerce Secretary Wilbur Ross on December 21. (The Census Bureau is part of the Commerce Department.) “The appointment of Dr. Brunell would be a significant departure from past practices and would further undermine the Census Bureau’s efforts to increase public trust in the Census. It would also raise questions about the Administration’s intent to comply with the constitutionally mandated requirement to complete an accurate count of the U.S. population.”

It is naïve to expect the administration of politics, and the selection of political appointments, to be nonpolitical. It’s also frequently inaccurate to assume a lack of partisan lean among purportedly apolitical experts in this field or that. But as we continue this mini-era of two-party polarization and distrust (even as many individuals opt-out of that binary), it’s appropriate to be on heightened alert when any administration, at any level of government, prioritizes the concerns and advocates from one side of the vote-counting wars while making policies that affect all of us.

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Is Bitcoin the Death of Fiat Currency?: Podcast

“Bitcoin is not competing with Visa or MasterCard. Bitcoin is competing with the Federal Reserve and the U.S. dollar,” says Michael Goldstein, president of the Satoshi Nakamoto Institute and host of the Noded Bitcoin Podcast. His co-host and the institute’s treasurer, Pierre Rochard, talk with Nick Gillespie about meteoric rise of bitcoin, how it can become a viable currency despite volatility, and how it may well spell doom for central banks and the gods of Keynesianism.

The Satoshi Nakamoto Institute is a group devoted to promoting bitcoin and working through many of the theoretical and practical challenges for the world’s best-known cryptocurrency. It’s named after Satoshi Nakamoto, the pseudonym of a programmer or programmers who launched bitcoin in 2009, in what Nakamoto called “a peer-to-peer electronic cash system.”

Bitcoin potentially offers at least two radical things to its users. First is a non-state-based currency, and second is a fully peer-to-peer accounting system in which every actor can verify all transactions virtually instantaneously. The program resides on the computers and servers of its users, decentralized in a manner straight out of a science fiction novel. Inspired by Milton Friedman’s and other economists’ theories of a noninflationary currency, there is a fixed number of bitcoin that will be mined out over time into computer space, thus limiting the ability of people to inflate or deflate its value, at least in theory. Having said that, bitcoin is in the news now because of its massive spike in cost. Once trading at pennies, it recently neared $20,000 per bitcoin.

Whatever its price, Goldstein and Rochard say that bitcoin is here to stay and that what call “hyper-bitcoinization” is already well underway.

Audio production by Ian Keyser.

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This is a rush transcript. Check all quotes against the audio for accuracy.

Gillespie: This is the Reason podcast, and I’m your host, Nick Gillespie. Please subscribe to us at iTunes and rate and review us while you’re there.

In January 2009, a pseudonymous programmer or set of programmers using the name Satoshi Nakamoto mined the first bitcoin, part of what he called a peer-to-peer electronic cash system, and creating the world’s first fully-realized cryptocurrency. Bitcoin potentially offers at least two radical things to its users. First is a non-state-based currency, and second is a fully peer-to-peer accounting system in which every actor can verify all transactions virtually instantaneously. The program resides on the computers and servers of its users, decentralized in a manner straight out of a science fiction novel. Inspired by Milton Friedman’s and other economists’ theories of a noninflationary currency, there is a fixed number of Bitcoin that will be mined out over time into computer space, thus limiting the ability of people to inflate or deflate its value, at least in theory. Having said that, Bitcoin is in the news now because of its massive spike in cost.

Once trading at pennies per bitcoin, the basic unit, it recently hit around $19,000 per bitcoin. So to talk about Bitcoin, its perils, its promises and its reality, today I’m talking with Michael Goldstein and Pierre Rochard, the president and treasurer of the Satoshi Nakamoto Institute, a group devoted to promoting Bitcoin and working through many of the theoretical and practical challenges for the world’s best-known cryptocurrency. They also do a podcast called Noded, N-O-D-E-D, Noded. Go check it out at noded.org.

Guys, thanks for talking to the Reason podcast today.

Goldstein: Yeah, thank you so much. As a lifelong libertarian, it’s an honor to be here.

Gillespie: All right. Well, I hope you feel that way … that’s Michael, right? I hope you feel that way when we’re done talking. Pierre, how are you?

Rochard: Great. Thanks for having us on, Nick.

Gillespie: Okay. So my first question to you, are either of you guys the creators of Bitcoin?

Goldstein: I can neither confirm nor deny it.

Rochard: I’m not, because I didn’t even know how to program back then.

Gillespie: And you guys are both … you met at University of Texas at Austin. Under what circumstances did you meet? And then how did that lead to creating the Satoshi Nakamoto Institute?

Goldstein: Yes. At the University of Texas there is a libertarian group called the Libertarian Longhorns, and as a spinoff we made the Mises Circle, which is dedicated to reading and discussing Austrian economics, so Mises and Hayek and Rothbard and Hoppe, Roberto, de Soto and others. And that’s where Pierre and I met. And one of our friends, another co-founder of the Satoshi Nakamoto Institute, Daniel Krawisz, had been into Bitcoin as early as 2011. So it was on our radar. But it was when Cody Wilson of Defense Distributed stopped by to give a talk on a project back in its early days before they even had anything, he sparked our interest in it in a way we couldn’t have imagined and introduced us to the ideas of crypto-anarchy and being able to send gold over the internet with Bitcoin. And it was then we started getting interested, and the Mises Circle quickly became much more so the Bitcoin Circle. We were discussing all of the economics of Bitcoin. And later on, in late 2013, after joking with a friend that there’s the Ludwig von Mises Institute for Austrian Economics, we need a Satoshi Nakamoto Institute for Crypto-Anarchy.

Gillespie: All right, so you’re ruthless cosmopolites, like Ludwig von Mises himself, as long as we’re talking about money that not only can freely flow wherever people send it or pull it, but that state governments have no control over, right? In many ways, would you agree that from a libertarian perspective, anyway, that is kind of the real lure of Bitcoin?

Rochard: Absolutely. And we use this word decentralized a lot. And we have to kind of look at why is it decentralized from a technical perspective, and it’s that we have a peer-to-peer network of nodes that are communicating to each other. And the node software, people voluntarily choose which version of the software they want to run, and that forms a consensus on the network as to what Bitcoin is. And that peer-to-peer nature and decentralized nature is what makes it impervious to tampering from governments.

Gillespie: We’ll get to that, because at a certain point when you want to … I don’t disagree with you, but then Bitcoin can exist kind of in the ether of cyberspace or what Al Gore tragically once called ‘the information superhighway.’ But at some point when you emerge to pay for something, there might be places where the government could grab your hand as it comes up out of the grave. But first, you guys talk about bitcoinization, hyperbitcoinization, after fiat currency fails. What do you mean when you talk in those terms, and why is fiat currency bound to fail? And that is money that is not backed by any particular commodity or good, but is rather just printed up by various governments. Why is fiat currency going to fail? What evidence do we have that it will fail? And then how does hyperbitcoinization come about?

Rochard: Well, I think to say that hyperbitcoinization happens after fiat currency fails is to get the cause and effects backwards. I think that hyperbitcoinization currently and for the past two years has been causing fiat to fail. It’s happening from zero. The value of one bitcoin started at zero, and it’s been going up from there. And it’s basically an economic process of more and more people acknowledging that Bitcoin has a better monetary policy than whatever their local fiat currency is, whether it’s the dollar or the Venezuelan bolivar, etc. And so as this circle of people who view Bitcoin as their store values, as their medium of exchange, as their unit of account, as that circle grows, the circle of people who view fiat that way shrinks. And so that’s the process of hyperbitcoinization, is essentially an acceleration of that economic process.

Gillespie: Okay. But now as a medium of economic exchange, Bitcoin is terrible right now, isn’t it, though, because you don’t know is it $19,000, is it $15,000, is it going back down to the low hundreds or back to zero.

Rochard: Well, I think that when we look at the evolution of a money, it has to bootstrap itself, essentially, and that is a very volatile process. But we’ve seen that the measured volatility has been decreasing, even though if you follow the charts it doesn’t feel that way in your gut. But if we look at the quantitative volatility, it has gone down. The other thing, though, is that we’re seeing the creation of new financial instruments that will help market participants hedge themselves against that volatility. We recently saw the CME and the CBOE come out with Bitcoin futures. So essentially if you’re a merchant who accepts Bitcoin but does not want to take on the volatility associated with that, you can hedge yourself as your bitcoins come in.

So there’s that. And then there’s just the fact that we have kind of an ideology in Bitcoin, it’s called ‘hoddling,’ which is essentially we’re going to hoard bitcoins. And hoarding has a negative connotation in mainstream economics, but in Austrian economics we do recognize that there’s always a reason people are engaging in an economic activity. And the reason that Bitcoiners are engaging in hoarding is because we anticipate that Bitcoin has not reached its full potential and its full reach in the global monetary system. So it makes sense to hold onto your bitcoins and to only spend them if you can replenish them. But otherwise it’s more of an investment than a method of payment today.

Gillespie: Right. But this is a growing pain through a necessary process of establishing Bitcoin.

Goldstein: Right. Exactly. And as Bitcoin grows and it reaches its full potential, which could be very high, then suddenly it will become more profitable for people to make use of their bitcoins in the sense of being able to purchase specific goods with the bitcoins. But for the time being, all of these ideological hoddlers, the hoarding is the using of it and there’s not really a desire to be spending them.

Gillespie: It must be very exciting to be Bitcoin enthusiasts, and seeing it’s been around now for going on nine years, and it really has pushed its way fully into the mainstream discussion. Everybody wants a piece of Bitcoin.

Goldstein: Yes. In fact, I remember with the Mises Circle, our first meeting that we did a discussion on Bitcoin was sometime in late 2012, and it was actually very difficult to find any news articles or any resources online beyond bitcoin.org and the Bitcoin Wiki to teach people about Bitcoin. And yet you fast forward to today and it’s actually difficult to find someone who hasn’t heard of Bitcoin. So that’s been quite an exciting change.

Gillespie: About 80% of the … this is part of … and at your Institute’s page, you can read Satoshi Nakamoto’s white paper, the official white paper, that kind of explains how Bitcoin works and what he or they are after in doing it. And there’s a set number of Bitcoin that will ever be mined, that will ever be emitted out into reality. About 80% of those are already out, and then the final coin, the actual date may change based on a variety of things, but it’s estimated to be mined or out in circulation around 2140. Explain briefly why it’s important for kind of the idea behind Bitcoin that there is a limited amount of money in the supply, that everybody knows it’s limited, and that after that there is no more.

Rochard: Yeah, so it’s interesting, because I think that it would have been okay if Bitcoin had a different monetary policy where essentially it emitted a certain percentage or a certain number of bitcoins every year indefinitely. But Satoshi, he decided to have it be essentially an asymptotic curve so that there would only ever be 21 million bitcoins. And Friedmanites, neoclassical economists, would probably have advised against that and would have said hey, no, you should have like 2% increase in money supply for per. Whereas I think the Austrian perspective on it is that there’s actually no difference between those two monetary policies as long as everyone’s expectations are the same from the get-go and that there’s not a change in the monetary policy. So I think that that’s kind of on the purely theoretical economic side. But on the reptilian brain side, I think that knowing that this is a limited edition, 21 million only, hits buttons in our brains that really only luxury goods tap into. And I think that’s why … it explains partially why Bitcoin has been so successful and has been gaining so much traction.

Goldstein: And it certainly creates a very strong Schelling point and completely removes a political variable, so as soon as you introduce the idea of well, increase it by 2%, well, why not 3% or 1%?

Gillespie: Right. So let’s talk about scaling, because each block in the blockchain of a bitcoin, it can process … my understanding, and correct me, I may have this wrong, but each block can process one megabyte of transactions or activity per 10 minutes. And it is already overloaded. How does the system, and at this point it costs people typically, and I realize people aren’t necessarily using it to buy a stick of gum or something like that, but each transaction costs about $10 or more because there is so much congestion on the blockchain. How does Bitcoin scale up from that to the size of something like Visa or MasterCard or a global network of voluntary transactions?

Goldstein: Well, the first thing to note is that Bitcoin is not competing with Visa or MasterCard. Bitcoin is competing with the Federal Reserve and the US Dollar. Visa and MasterCard themselves are a layer two, if not layer three, payment network, so they’re built on the system of the US Dollar and other fiat currencies. So really what Bitcoin has to focus on is the underlying reserve asset, the bearer certificates that make up this whole system. And because the blockchain requires having this whole system of mining in order to remain decentralized and sovereign, it’s important to be able to pay transaction fees in order to pay for this mining to occur.

Rochard: Right. Because we were describing earlier that the number of bitcoins getting created is going down and down, and ultimately it will be zero. And so if it’s at zero and we don’t have any transaction fees, then the security of the network would be compromised. So there’s the argument of we need to have what’s called a fee market and have competition for transactions to get into the blockchain in order to compensate for the decrease in what’s called the subsidy, which is the creation of new coins. But I think that it’s important to note that while Visa and MasterCard could be Bitcoin denominated, and there’s no reason why they wouldn’t do that eventually, I think the wider philosophical issue is that wasn’t Bitcoin created to send value without going through financial institutions.

And that, I think … when we talk about the white paper describing what Bitcoin is, I think that the white paper describes a vision, which it turns out that the practical reality of Bitcoin scaling properties are such that we’re going to have to build a layer two on top of it. And the innovation there has been what’s called the Lightning Network, which uses the underlying Bitcoin network to secure a secondary network where the properties of it are significantly different in that you’re not transmitting every transaction to every node, and you’re thus able to send transactions at a much faster rate and at a much lower fee. And so that currently is under development, and I think there’s a lot of frustration within the community that it is still under development and it’s not in production yet, whereas Bitcoin’s popularity has really outpaced its ability to maintain low fees.

Gillespie: So the lightning network or layer two is going to be laid on top of the Bitcoin system, but doesn’t that open up the possibility of fraud or double-dealing, because it’s in that space between a transaction being settled, or being made to being settled, that’s where all kinds of flimflammery comes into being. That’s what happens with Visa cards. Somebody steals your Visa card, they charge a lot of stuff, you don’t see it until the next day or even the next month when your account comes in. Then you charge fraud. And then you don’t pay that, but that money is spent twice.

Goldstein: So the beauty of the Lightning Network is it’s built using Bitcoin payment channels with additional properties, some new op codes, some new scripting has been introduced to the Bitcoin ecosystem that allows for more advanced features. But basically these payments channels, they’re made up of individual Bitcoin transactions that are technically valid on the network but do not get broadcast until someone is ready to walk away from the network, so it’s closed their channel. And so in this sense, every single Lightning Transaction that’s occurring at a high speed, so if you’re having millions of them every second, every single one of them is technically a valid Bitcoin transaction that can be where the Bitcoin blockchain can be brought in to adjudicate a dispute, so to speak, but every single one is fully backed by an actual bitcoin on the Bitcoin blockchain.

Gillespie: And you’re confident, though, that … I guess for me this is the question. I know when I have fraudulent charges made using a credit card of mine or something, I call Visa or I call my bank and I say, ‘Hey, I didn’t do that,’ and they’re like, ‘Okay, we’ll eat it.’ Because if you’re waiting to settle a transaction, though, there is that gap there. And isn’t that part of like using kind of blockchain technology to settle accounts? This is one of the positive things that people are talking about blockchain, that instead of having to wait five days or more for a financial transaction to settle, working its way through various government stamps and bank stamps and all of that, you can do it instantaneously so that that kind of float disappears. That’s where the efficiency and that’s where the end of fraud happens. So if there is a float between the transaction being made and settled, it just seems to me like there’s going to be fraud.

Goldstein: Each Lightning Transaction is being settled. Whenever you send a transaction, all parties involved are signing each of those transactions and settling it. It’s not going to be closed and settled fully on the blockchain, which is a much more expensive process, until later. But even then, with the fraud, that would be something that people can add on top of that, where people can adjudicate different things, because the lightning network can’t adjudicate for real goods being sent in the physical world, it can only handle the payments itself. So people can emerge with business models to help provide fraud services for that.

Rochard: So the Lightning Network has the same property as the Bitcoin payment network of being irreversible, in the sense that someone can’t take an old lightning transaction and use it against you. If they try to do that, then they will lose all of the money that they’ve put into that payment channel. And that’s how the lightning network essentially punishes people for trying to commit fraud. So I don’t think that the reversibility is an issue. It’s actually, like you were describing, more of the irreversibility that is a problem, where we do need to have services built on top of lightning network that provide consumer protection.

Gillespie: And I know based on reading your guys’ stuff as well as the general worldview that you’re coming out of, this is exactly what the market is sussing out now. It’s a discovery process and a lot of different things are being tried. But you’re confident that all of these sorts of issues are not just going to be worked out, but they’re actively being worked out now.

Goldstein: Yes. And I would also say that I don’t base my Bitcoin ideology on the specific success of the Lightning Network. The Lightning Network is just one instance of a technology that people have developed that can act as a decentralized payment network on top of Bitcoin. But time will tell what other kind of decentralized and centralized solutions people can come up with that different people using the Bitcoin network will subjectively value as their preferred means of interacting economically with the network.

Gillespie: All right. So this is the dreamworld of many Austrian economists of competing currencies, or of competing models of exchange, right?

Rochard: Well, it’s important to distinguish between the monetary properties of Bitcoin and then the payment network properties, because I’m not particularly attached to using the Bitcoin network as a payment network for my day-to-day transactions. What I am attached to is having things be Bitcoin denominated and have Bitcoin be the standard of value that we use in society and have that be our sound money. So I think that it goes back to what Michael was saying, is that yeah, it’s not so much the specific implementation details of the payment network that I am enthusiastic about. It’s more the monetary policy of the money itself.

Gillespie: But a number of Nobel Prize winners, gold bugs … I mean, there are a lot of people who are arrayed against Bitcoin, saying that it is fantasy, that it’s a craze, it’s dumber than tulip bulbs because you don’t even get a flower at the end. Do you think anything other than either a kind of jealousy or a failure of vision is motivating those criticisms of Bitcoin?

Goldstein: Well, I think it’s a fundamental assault on their entire economic vision of the world. And Bitcoin imposes a strict Austrian economic policy on the economy, and it’s also something that they don’t get a say in. No one called up Paul Krugman to ask him if Bitcoin was a good idea. Someone just wrote the code and put it out there, and all of us adopted it despite these people telling us it’s bad for years. We’ve heard from every economist and pundit how terrible it is, and everyone continues to still buy it. So they don’t have the same kind of political clout in the Bitcoin world that they do in government-issued currencies.

Gillespie: So the Keynesian god is failing, and I guess it’s even broader than that. A lot of very market-friendly economists seem to be upset by it. What about gold bugs? In libertarian circles, I’d say the enthusiasm for Bitcoin is only matched by a lot of negativity coming from gold bugs, who are calling this a joke or a scam. I understand why a noninflationary monetary system which happens without the benediction of politicians or Nobel Prize-winning economists would piss those people off. What is it about Bitcoin that gets under the skin of gold bugs?

Rochard: I think that its lack of physical, tangible existence. We’re just not used to thinking of digital goods as being scarce. We’re used to thinking of them as being abundant, and with … Hard drives get bigger and bigger every year, so in a sense we have digital hyperinflation of digital goods, whether it’s streaming video or audio or text or blogs and all of this, we have a hyperabundance of digital goods. And so just the idea of ‘oh, well, we’re going to make a digital money,’ to them is laughable, because there’s no physical constraints on the production of this money. I think that obviously the part they miss is kind of how the network functions and how a social consensus can form around a technology like this.

Gillespie: Yeah, and in a way it’s like super gold, and obviously people like von Mises and many of the Austrian school like the whole promise of gold as a backer of currency is that it’s finite, that the supply is finite. Obviously it gets … when a new, big mine is found, or vein, it can change things. But the whole idea is that it takes the creation of money out of the hands of political consideration. So Bitcoin is doing that in a way that is more effective and final than the natural world could.

Rochard: Yeah. The reason I think that it is more effective is that when the price of gold goes up, you see more gold mining happen, because now miners can justify higher costs for digging up gold. And you don’t have that with Bitcoin, because the Bitcoin network has something called the mining difficulty, and that adjusts every two weeks to make sure that the schedule is maintained. So in that regard I do think that Bitcoin is actually a sounder money than gold.

Goldstein: Yeah, it’s even more scarce than gold. It’d be more difficult to create more Bitcoin than it would be to create a nuclear fission device to create gold out of thin air.

Gillespie: Do you think that other cryptocurrencies will compete with Bitcoin, not just Bitcoin maximalist, but also Bitcoin exceptionalist, that it’s really Bitcoin or bust in the cryptocurrency space?

Rochard: I think that they do currently compete with Bitcoin, although it is also a matter of the pie is growing, and these different alt coins appeal to different people and kind of almost different economic thoughts. Like there’s one that’s called Freicoin, which has a phenomenon called demurrage, where essentially they take coins away from you over time so that you’re incentivized to spend it. So each coin kind of has a separate value proposition that it’s trying to compete with Bitcoin on. But ultimately at the end of the day, I think that it’s a winner-take-most market, the market for money, because the whole point of money is that we avoid barter and that we’re all kind of transacting on the same basis. So I think that the natural market process lends itself to Bitcoin maximalism, or amaximalism. And then the reason that there’s an exceptionalism for Bitcoin is purely a matter that it was first. It was the first cryptocurrency to gain traction and to succeed on this level. And there I turn to a phenomenon called the Lindy Effect, which is that the longer that something’s been around, the longer you can expect it to continue to be around. And I think that’s a key heuristic of money.

Gillespie: So two final questions, one philosophical and one kind of gossipy. The philosophical one is that one of the things that gets talked a lot about with blockchain, and you guys alluded to it before, is that it gets rid of the need for intermediaries in all sorts of transactions. You don’t need trusted third parties to help make something okay, like kind of valorize or validate something. In a weird way, and this is probably more philosophical than practical in this case, but part of the genius of capitalism, of a free market economy, is precisely those intermediaries who add value. The Marxist critique of capitalism is that there’s only these people who get in the way and they suck up all of the value, all of the labor value, and profits are fraud that you just expropriate from people. But really, intermediaries are what make capitalism work. It’s people who see sand in the desert that is plentiful and cheap and they bring it to people who need it to make cement or concrete or silicon chips and all of that kind of stuff. Is there a fundamental kind of contradiction at the heart of Bitcoin and blockchain of that it’s perfectly capitalistic, and yet it seems to be all about the abolition of intermediaries?

Goldstein: No, I don’t think there’s a contradiction. Instead, I think what Bitcoin offers that’s so fantastic is that it allows people to start thinking about these institutions as being opt-in rather than kind of forced upon them. Right now if I wanted to interact with dollars, I have no choice but to go get a bank account at Chase or Bank of America or wherever and operate on the Visa network and PayPal and just hope that they don’t screw with me. While with Bitcoin, it takes us back to square one at the base level and lets us rebuild these institutions in a way that better reflects people’s actual needs and desires without the sort of various fraudulent business models or fractionaries or banking or the unfair business practices of freezing people’s accounts. People now have to compete at a much more rigorous level to create these business models in a Bitcoin world.

Gillespie: Well, that assuages all of my fears. Thank you for that. Final question. Do you guys have any idea of who … you said it wasn’t you, but who is or are Satoshi Nakamoto? Who are the likely candidates, and does it matter?

Rochard: I think that as the leaders of the Satoshi Nakamoto Institute, that it really would be inappropriate for us to even speculate on the matter and lend credence to rumors or gossip. But I do think that there has been … we’re starting to see a little too much of hero worship or idealizing Satoshi as a soothsayer, as someone who predicted the future, and his vision is kind of what we should aspire to or intently follow. It’s clear to me and to quite a few others in the Bitcoin world that today we understand Bitcoin better than Satoshi did when he left Bitcoin. And that’s because we’ve seen how it has scaled and we’ve seen how people interact with it, and we just have a better understanding of what Satoshi created. So I think that it is important to its origin story that Satoshi remain pseudonymous, and I also think that it lends itself to a bit of hero worship, which might not be healthy, but ultimately is inconsequential.

Gillespie: All right. Well, we will leave it there. Thank you so much for talking. This has been the Reason podcast, and we’ve been talking with Michael Goldstein and Pierre Rochard, the president and treasurer, respectively, of the Satoshi Nakamoto Institute, a group devoted to promoting Bitcoin and working on the theoretical and practical implications of the world’s most fully-realized cryptocurrency. They also do a podcast called Noded. N-O-D-E-D. Go check it out on noded.org. For Reason, this is Nick Gillespie. Please subscribe to us at iTunes, and rate and review us while you’re there. Thanks so much for listening.

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NY Declares State Of Emergency: JFK, La Guardia Close Due To Huge Winter Storm

Flights at JFK airport have been temporarily suspended “due to strong winds and whiteout conditions” caused by Winter Storm Grayson.

 

 

“Travelers are urged to contact their airline carriers for updates on resumption of service,” the JFK Twitter account advised.

 

JFK

New York Gov. Andrew Cuomo declared an official weather emergency in New York City, Long Island and Westchester County on Thursday as the storm is expected to drop up to a foot of snow on New York City.

Nearly all flights out of La Guardia, New York City’s other major airport, were cancelled late last night in anticipation of the storm.

 

 

Newark Airport warned flyers to double check on the status of their flights because many had been cancelled.

 

 

The airline-tracking site FlightAware is reporting more than 3,200 canceled flights within, into, or out of the United States on Thursday, the Associated Press reported.

The massive winter storm is sweeping from the Carolinas to Maine, dumping snow along the coast and bringing strong winds.

The governor of Massachusetts is warning of possible prolonged power outages resulting from the strong snowstorm that is pummeling the East Coast, to be followed by more severe cold.

 

JFK

Gov. Charlie Baker said during a morning briefing Thursday that emergency officials are prepared to open shelters in southeastern Massachusetts and Cape Cod, where heavy wet snow and howling wind gusts of 60 mph or higher pose the greatest threat of outages.

The strong winds could also make it difficult, if not impossible, for utility crews to use bucket trucks to quickly restore downed power lines.

 

JFKTWO

In Connecticut, Gov. Dannel P. Malloy says more than 100 warming centers are open in 34 towns. Malloy says the state has 634 state plow trucks and 250 contractors working to clear the highways.

Already, two deaths in North Carolina are being blamed on the East Coast snowstorm.

 

JFK

Authorities say two men died during the winter storm Wednesday night when their pickup truck overturned into a creek.

 

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Republican Wins Random Draw For Virginia House Seat That Ended In A Tie

Republicans across Virginia breathed a sigh of relief when moments ago a random draw determined that Republican David Yancey would keep his seat in the Virginia House of Delegates after a state official pulled his name out of a bowl Thursday, deciding a contest that ended in a tie in November. As a result of nothing more than luck, the GOP will also keep control of the chamber.

Or, as one twitter commentator put it, “welcome to 2018 where a $9.99 product from Crate & Barrel determines elections…”

The draw took place after Yancey and Democrat Shelly Simonds each received 11,608 votes in their Newport News-based district. Initial results showed Yancey leading by just ten votes. A recount gave Simonds a one-vote edge. But Republicans challenged a single ballot, resulting in a tie, the Hill reported.

Democrats sued to overturn the challenge, but on Wednesday a three-judge panel rejected their complaint. That led to Thursday’s drawing, in Richmond, out of a special bowl crafted by the resident potter at the Virginia Museum of Fine Arts.

The lucky draw has major implications as Yancey would be the 51st Republican in the 100-member House of Delegates. Before November’s elections, Republicans held 66 seats. But Democrats put up a surprisingly strong showing, netting 15 Republican-held seats — and coming within a single vote of claiming a tie.

Virginia state law allows the loser of the draw to request a second recount. Simonds said Wednesday she would not request a second recount if she lost the drawing. Yancey declined to make the same pledge, although luckily he wont have to.

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Pyongyang Scores Major Victory After US & South Korea Agree Not To Hold Military Drills During Olympics

One month ago, in what appeared to be an imminent diplomatic victory for North Korea’s president Kim Jong-Un, we reported  that Kim’s regime may have “successfully bluffed its way into getting the US to stop holding massive army drills with South Korea’s army.” As the FT further noted, South Korea asked the US to “delay” joint military exercises until after the Winter Olympics, in order to lower the chances that North Korea takes provocative actions during the Pyeongchang Games, which Seoul wants to use to showcase the country’s development.

Well, if it was North Korea’s intention to bluff its way into blocking joint military drills off the Korean peninsula, it succeeded because as the WSJ reports, President Trump and South Korean President Moon Jae-in agreed not to hold springtime military exercises during the Olympics, the South Korean president’s office said Thursday, a move that could cool tensions with North Korea.

The agreement came during a 30-minute phone call between the two presidents, Seoul’s presidential Blue House said in a statement.

As noted last month, Moon had requested the U.S. delay the annual exercises, which Pyongyang has railed against, so they don’t coincide with the Paralympics, which end on Mar. 18. Meanwhile, disagreement has been brewing between Seoul and Washington over how to rein in North Korean leader Kim Jong Un’s nuclear weapons program. The U.S. late Wednesday in Washington requested South Korea arrange the call, an official at the Blue House said, declining to comment further.

The detente took place in the past 48 hours, however, when the Moon administration seized on an opening from North Korea to propose a face-to-face meeting next week to discuss its atomic weapons program and an announcement by Kim that he would consider sending a delegation to the Winter Olympics in the South Korean ski resort of Pyeongchang next month.

“We will closely cooperate with the U.S. in any talks with the North, and strongly believe inter-Korean talks will help create a mood desirable for U.S.-North Korea talks aimed at resolving the North Korean nuclear weapons issue,” Moon said in the call, according to the Blue House, which also said that Trump said “the U.S. supports Mr. Moon 100%.“

The statement avoids another potentially embarrassing diplomatic fiasco: as the WSJ notes, the talks have emerged as a point of tension. Seoul has tried to dispel rumors that it approached the North without consulting the U.S.

It has also tried to assuage concerns that talks could lead to a cancellation of the springtime military exercises.

“The South Korean government disagrees with the idea of cancelling the military exercises in return for the North halting its nuclear weapons program,” South Korean Foreign Ministry Spokesman Roh Kyu-deok said in a press briefing Thursday. The South also consulted the U.S. through diplomatic channels before proposing talks on Tuesday, he added.

South Korean Foreign Minister Kang Kyung-wha said the South would aim to better relations with the North, while also cooperating with global efforts to resolve the North Korean nuclear weapons program.

The South Korean defense ministry in a separate briefing Thursday dismissed reports that the North could be preparing a missile launch, saying the South had not detected any unusual activities hinting a launch was near, declining to comment further.

* * *

Meanwhile, Trump did everything in his power to save face in light of the detente between the two Koreas by trying to take credit for the apparent thawing of diplomatic tensions between the two nations, stating that his “firm and strong” stance has enabled talks.

Trump, who has openly traded insults with Kim and once suggested North Korea’s long-range missile program should be met with “fire and fury,” tweeted on Thursday that his approach to the delicate situation had fostered an environment for talks.

Slamming “failed experts,” Trump asked if the recent communication between North and South Korea would really be happening without his involvement. “Fools, but talks are a good thing,” the US president added.

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WTI/RBOB Rise After Biggest Crude Draw Since August

WTI/RBOB were sinking into the DOE data, despite API’s solid crude draw data, after tagging $62/$1.81 overnight. Official data confirmed API’s with the seventh straight week of crude builds (biggest crude build since Aug) and gasoline draws but it was distillates’ massive build (most since Dec 2016) that stood out.

A pull-back in prices might be seen if builds in gasoline and distillate inventories are larger than a crude oil decline, according to Bob Yawger, director of the futures division at Mizuho Securities USA. Yet, a second weekly drop in U.S. crude production would be “a bullish indicator.”

Bloomberg’s Intelligence Energy Analysts Fernando Valle and Vince Piazza note the potential weather effects…

Although winter usually ushers in a slowdown in demand, refiners are being encouraged to use domestic crude instead of imports tied to the Brent benchmark, whose price remains elevated because of Middle East tensions.

Cold weather in the Northern Hemisphere is having diverging effects on distillates and gasoline. It’s making distillate refining margins larger, putting downward pressure on supplies, while gasoline cracks are likely to narrow as frigid temperatures discourage domestic demand and exports.

API

  • Crude -4.992mm (-5mm exp)
  • Cushing -2.11mm
  • Gasoline +1.87mm (+2mm exp)
  • Distillates +4.272mm (+500k exp) – biggest build since Jun 2017

DOE

  • Crude -7.419mm (-4.7mm exp) – biggest draw since Aug 2017
  • Cushing -2.441mm
  • Gasoline +4.813m(+2mm exp)
  • Distillates +8.899mm (+500k exp) – biggest build since Dec 2016

This is the seventh straight week of crude draws and gasoline builds but it is distillates’ massive 8.9mm builds (the most since Dec 2016) that stands out… As Bloomberg notes, Distillate shipments were the lowest since ports were shut post-Hurricane Harvey in September. That accounts for at least 2.5 million of the distillate stock build.

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Bloomberg Intelligence Energy Analyst Fernando Valle:

The massive refined product builds of 4.8 and 8.9 million barrels for gasoline and distillate, respectively, will dampen optimism for the 7.4 million barrel crude withdrawal. Implied demand fell significantly, impacted by the holiday season and a large drop in product exports.

Notably Cushing stocks have declined considerably, nearing their 5-year average for the first time since Jan 2015.

Imports to the Midwest hit a record of almost 3 million barrels a day last week. Enbridge’s pipelines are filled to the gills, and the deep discount of heavy Canadian crude has opened the arb for rail shipments.

Total crude inventory is now at its lowest since Oct 2015 (but is still around 28% above the pre-2014 normal average)…

 

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Production fell the prior week for the first time since the hurricanes, but rebounded in the latest week by 28k b/d…

 

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“We may soon see an end to the rally because prices at this level will only make U.S. drillers boost production,” said Will Yun, a commodities analyst at Hyundai Futures Corp.

 

WTI traded above $62 overnight continuing its best start to a year since 2012. This is the highest in three years as optimism on the global economy, cold weather and political unrest bolstered a market that’s finally shaking off a prolonged surplus. But while the overnight session was exciting, WTI/RBOB prices slid lower into the DOE data and the machines seemed unsure which way to run prices after the data…

 

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“The year has started very, very well for OPEC,” Amrita Sen, chief oil analyst at consultants Energy Aspects Ltd., said in a Bloomberg television interview.

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Economists Think Inflation Will Rise Sharply In 2018: They’re Wrong

Authored by Mike Shedlock via http://ift.tt/2wOif0B,

Let’s investigate six reasons economists think inflation is about to pick in 2018, and why I think they are dreaming.

Reason Number One – Wage Hikes

Minimum wages rise in 18 states starting in 2018.

Former Fed Vice-Chairman Stanley Fischer told Bloomberg TV on October 4, “I still believe we will have higher inflation. The basic mechanism here is unemployment is declining all the time, wages will start going up at some stage.”

Wage Hike Rebuttal

The National Bureau of Economic Research paper: Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle, 2017 concludes there was a negative benefit to low wage workers as a result of wage hike.

  1. A 9% reduction in hours worked at wages below $19/hour.
  2. A reduction of over $100 million per year in total payroll for low-wage jobs, measured as total sum of increased wages received less wages lost due to employment reductions. Total payroll losses average about $125 per job per month.
  3. The findings that total payroll for low-wage jobs declined rather than rose as a consequence of the 2016 minimum wage increase is at odds with most prior studies of minimum wage laws. These differences likely reflect methodological improvements made possible by Washington State’s exceptional individual-level data. When we replicate methods used in previous studies, we produce the same results as previously found.

This is an issue that’s debated over and over again, mostly with poor methodologies to come to the desired conclusion.

In contrast, the NBER had “exceptional individual-level data”.

Adding support the NBER’s conclusion, the Bank of Canada estimates Minimum Wage Hikes Could Cost Canada’s Economy 60,000 jobs by 2019.

By the way, and as discussed in Staggering Rent Increases in 2017, the median U.S. rental now requires 29% of median monthly income, according to Zillow. Between 1985 and 2000, renters spent about 25.8% of their income on housing.

Next, factor in student debt.

Finally, note the staggering fact that 24% of millennials are still paying down Christmas purchases from 2016.

The proper conclusion is wage hikes are not sufficient to pay down debts let alone to be used chasing the prices of goods and services higher.

Reason Number Two – Declining Unemployment

This is the Phillips Curve thesis.

The theory claims there is a historical inverse relationship between rates of unemployment and corresponding rates of inflation.

In short, falling unemployment will lead to a rise in inflation.

In March of 2017, Janet Yellen commented in a post-FOMC Q&A “The Phillips Curve is Alive“.

Also note that Stanley Fischer also mentioned falling unemployment as a determinant for rising inflation.

Declining Unemployment Rebuttal

In advance of the 1973-1975 recession, economist Milton Friedman correctly predicted both inflation and unemployment would increase.

Wikipedia offers this amusing comment: “In recent years the slope of the Phillips curve appears to have declined and there has been significant questioning of the usefulness of the Phillips curve in predicting inflation. Nonetheless, the Phillips curve remains the primary framework for understanding and forecasting inflation used in central banks.”

It’s rather amazing anyone still has faith in Phillips Curve nonsense.

Yet the outgoing Fed Chair, Janet Yellen, and the former Vice-Chair, Stanley Fischer, are believers.

Reason Number Three – Trump Tax Cuts

At the December meeting, the Fed upped its estimate of GDP growth on the expectation Congress would pass a tax bill.

According to the December FOMC Economic Projections, “Most participants indicated that prospective changes in federal tax policy were a factor that led them to boost their projections of real GDP growth over the next couple of years; some participants, however, noted that they had already incorporated at least some effects of future tax cuts in their September projections.”

Tax Cut Growth Rebuttal

John Hussman discusses economic growth in his excellent stock market valuation article Survival Tactics for a Hypervalued Market.

 

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“Given that record earnings and depressed corporate borrowing rates have not sufficed to boost net domestic investment beyond half of its historical norm, and prior tax windfalls (e.g. the 2004 repatriation holiday) were almost entirely expended on dividends and stock buybacks, there’s little reason to expect any sort of durable surge in capital spending. That’s particularly true given a 4.1% unemployment rate and already deep account deficits, since rapid growth in capital spending invariably emerges from wholly opposite conditions,” states Hussman.

Christopher Whalen at The Institutional Risk Analyst says A Cash Repatriation Bonanza? Think Again

“One of the most outrageous fallacies put forward by economists over the past year is that lower US corporate tax rates will cause the repatriation of offshore cash balances. This view, which is widely endorsed by many analysts, fails to reflect the true nature of offshore tax schemes and how problematic it will be to reverse these complex transactions.”

I suggest reading Whalen’s excellent article to understand the numerous complexities involved.

Reason Number Four – Falling Dollar

The general theory in play is that a falling dollar means rising commodities and higher prices on goods, especially imports.

Falling Dollar Rebuttal

 

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The above chart shows the year-over-year percentage change in the Personal Consumption Expenditures (PCE) price index vs the year-over-year change the US dollar index.

There is no relationship.

Reason Number Five – Money Velocity

This reason I found in a Tweet by LizAnn Sonders.

 

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Money Velocity Rebuttal

A three month average vs a six month average offset by 21 months seems like a lot of curve fitting.

Here is a Tweet Reply by Martin Pelletier that makes sense to me.

 

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By the way, let’s look at what we are talking about here in actual terms instead of percentage increases.

 

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Reason Number Six – Rising Price of Crude

The rationale behind this idea is a rising price of crude portends higher prices, and not just for food and energy.

Here is a chart that I created that shows the relationship.

 

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Rising Price of Crude Rebuttal

There is merit to point number six.

Note that even core PCE prices which exclude food and energy are very highly correlated without having to do arbitrary time shifts.

However, point six implies the price of crude will climb still higher.

Will it? I don’t know. Nor does anyone else. However, we can say that at least some of the recent rise is related to tension in Iran.

We can also say that Trump is fanning those tensions.

On the other hand, the Washington Post reports U.S. crude oil production is flirting with record highs heading into the new year, thanks to the technological nimbleness of shale oil drillers.

Synopsis

There is no basis for five of the six most popular reasons reasons behind the widespread belief that a big surge in inflation is on the way.

Oil might provide a reason, but if the price of oil declines, even core inflation is likely to decline.

What is Inflation?

Somehow we managed to get through all of these points and counterpoints without even addressing the questions: What is inflation? And how do we measure it?

The above discussion analyzes things using the Fed’s preferred measure of inflation, core Personal Consumption Expenditures (PCE) as a meaningful definition.

Problems with the definition are numerous. PCE does not include home prices or asset prices in general.

The BLS uses a bizarre measure called Owners Equivalent Rent (OER) to calculate rent increases.

OER vs Case-Shiller Home Price Index

 

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Here is the exact question the BLS uses to determine OER: “If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”

OER has the largest weight“>largest weight in the CPI at 24.583%.

If the CPI included home prices rather than OER the impact would be 24.583% of the difference between the lines.

For example, in November of 2013, instead of reporting year-over-year CPI at 1.24% the BLS would have reported 4.06%.

Looking for Inflation?

The Fed, Bloomberg Econoday, and countless economic analysts are wondering why QE did not produce inflation.

It’s right in front of their noses in home prices, in Bitcoin speculation, in demand for covenant lite bonds, and in dramatically understated medical costs.

Instead, the Fed believes in the Phillips Curve and thinks Core PCE is an accurate measure.

Bubbles Everywhere

As a direct result of the Fed’s total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.

No Economic Benefit to Inflation

BIS Deflation Study

​The BIS did a historical study and found routine price deflation was not any problem at all.

​“*Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive*,” stated the study.

​For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

​CPI or PCE deflation is not to be feared.

More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

​It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

​Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

Unintended Consequences

If you one single compelling reason that inflation (as defined by the Fed and the academic illiterates) is not about to soar in 2018, here it is: a massive debt overhang.

Debt Deflation Coming Up

Another debt-deflation bubble bursting episode is coming up.

All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher.

It’s the Debt Stupid

Conventional wisdom says we need more inflation to deflate away the value of of debt on the books.

As of November 30, 2017, Treasury Direct reported public debt as $20.59 trillion. That includes $5.67 trillion in debt we owe to ourselves (think Social Security).

At higher rates of inflation, interest on the national debt would soar.

Boston Fed President Eric Rosengren believes an Inflation Goal of 2% is Too Low.

San Francisco John Williams has stated that the Fed’s 2 percent inflation target requires some rethinking, and likely needs to be higher.

What a hoot! Despite massive amounts of QE the Fed could not hits its inflation target using its own measure of inflation as a definition. Somehow they magically believe that setting a higher target will in and ofitself cause inflation.

Imagine what 6% mortgages would do to home price affordability.

Throw conventional wisdom in the ash can. In practice, the more debt and leverage the Fed stuffs into the system, the lower interest rates must be to support that level of debt.

Final Irony

We are close to the end of this inflationary cycle just as the average analyst thinks inflation is about to pick up.

The Fed might even buy into the notion of rising inflation, especially if crude does spike in early 2018.

Then economists will accuse the Fed of “hiking too much” when the fact of the matter is the Fed once again held interest rates too low, too long, in a foolish attempt to cram more debt into a system literally choking on debt.

Currency Crisis, Debt Deflation on Deck

Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It’s far too late to believe anything reasonable can be done about the mess the Fed has created.

Buy Gold

 

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Do yourself a favor, buy gold. It’s a strong favorite to soar when faith in central banks comes into question.

via RSS http://ift.tt/2E6UfJk Tyler Durden