Pelosi Says Will Cooperate With Trump On Infrastructure Spending, Hopes To Be Speaker

In a fig leaf offering of cooperation, Democratic House leader Nancy Pelosi, fresh off her victory in the House, said she spoke with President Donald Trump and Mitch McConnell about working together on infrastructure spending that would help create jobs.

“That issue has not been a partisan issue in the Congress of the United States,” Pelosi said during a press conference at the Capitol, adding that the Democrats captured control of the House by focusing on health care.

Separately, Trump described what he called a “very warm conversation” with Pelosi Tuesday night, but then complained and pushed the notion that Democrats are out to impeach him, saying that the country is fatigued by investigations into his conduct, and warns that if House Democrats push more probes, it will only benefit him politically.

Addressing the topic, Pelosi wouldn’t say whether that will or will not happen; instead, she focused on what she called the legitimate oversight duties the new Democratic-led House would conduct through committees. Pelosi however warned that while bipartisanship is important, the midterm election also “restores checks and balances” so that Congress won’t “be a rubber stamp for President Trump”.

“Yesterday’s election was not only a vote to restore people’s health care, it was a vote to restore the health of our democracy.”

Pelosi insisted that Democrats would not go “looking for a fight,” but if a subpoena is needed to conduct oversight, or get information, “so be it.”

Finally, Pelosi expressed confidence that she will be elected speaker: “Yes, I am.” She will need 218 votes on the House floor for that to occur.

However, as The Hill notes, Pelosi has a “math puzzle” to solve as she embarks on her quest to reclaim the Speaker’s gavel. A dozen Democratic candidates who have been critical of the California Democrat won election to Congress on Tuesday night, while another 12 incumbents have vowed to oppose Pelosi’s bid to lead the conference.

That’s a problem for Pelosi, who can’t afford more than a dozen Democrats to vote against her in a public floor vote for Speaker.

Democrats are likely to have just a 10 to 15-seat majority after the midterms once a handful of contested races are determined.

“She’s got a serious math problem,” said one Democratic lawmaker who has been in contact with both anti-Pelosi candidates and incumbents. “By my count, it’s 20 to 21 people who oppose her.”

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President Trump Credits Himself for Republicans’ Performance in the Midterms

|||KEN CEDENO/UPI/NewscomPresident Trump offered up some analysis on the gains and losses in Congress following Tuesday’s midterm elections. While Republicans maintained control of the Senate, Democrats picked up a majority in the House. On Wednesday, Trump opined that congressional Republicans who lost their bids for reelection did so because they did not fully embrace him.

During a Wednesday afternoon press conference, Trump identified by name Republicans who lost their races, including Utah Rep. Mia Love. Though Love’s race against Democratic challenger Ben McAdams has not yet been called, Trump accused her and others of not giving him any “love.”

Trump previously tweeted similar sentiments on election night, saying that those who embraced “certain policies” did well.

Were he capable of it, Trump would benefit from re-examining that theory. Among the major losses on Tuesday night was that of Trump ally Dave Brat. Brat, who is a member of the House Freedom Caucus, enjoyed an endorsement from the president in October and has frequently voted in support of the president’s “MAGA” agenda. Despite standing with Trump, and his stunning defeat of Eric Cantor in 2014, Brat still lost his Virginia seat.

Other Republican candidates who aligned themselves with the president found that a hardline immigration stance either cost them their elections, or, in the case of Iowa Rep. Steve King, made races closer than they’d ever been. In fact, several Republican victors noticeably won their races by slim margins, even in areas where they historically performed well. In Florida, for example, Republicans have won the governorship for the past 20 years. But Republican gubernatorial candidate Ron DeSantis, who made a point to build a literal wall with his children and read them bedtime stories about Trump, won by a mere 0.7 points. Similarly, Sen. Ted Cruz (R) beat progressive Rep. Beto O’Rourke (D) in the Texas Senate race by a mere 1.5 points.

Trump should celebrate his win. After all, if he is presented with another opportunity to nominate a Supreme Court Justice, he’ll need only the Senate. But he may wish to reevaluate what the midterms meant for his agenda as a whole.

The full press conference can be viewed below.

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Silicon Valley Investor Admits ‘Start-Up Economy’ Is A Ponzi Scheme

Authored by Michael Scott via Safehaven.com,

Silicon Valley’s Chamath Palihapitiya, the tech investor behind the Social Capital venture firm, is telling clients that the start-up economy is has turned into a sophisticated – and dangerous – Ponzi scheme and the high-stakes losers are employees and limited partners.

In a letter from Social Capital, Palihapitiya notes that “over the past decade, a subtle and sophisticated game has emerged between VCs, LPs, founders, and employees”, and someone has to foot the bill for it as VCs are “smart enough to transfer the risk”.

He compares it to the American healthcare industry, which he says is so expensive because “insurers, who play a key middleman role in setting prices for medical care, have a fantastic two-sided business model”.

“High prices, which out to be a cost of doing business for them, are actually a key revenue driver,” Palihapitiya says.

That’s because high prices make it possible for them to charge high premiums and milk the cow extensively. That keeps the cost of medicine on the steady increase, along with insurance profits. Who’s left holding the bag? Patients and payers.

This is exactly how VCs are operating in the start-up world, he says. They “habitually invest in on another’s companies during later rounds, bidding up rounds to valuations that allow for generous markups on their funds’ performance”.

Then, like health insurance companies, that makes it easier for them to generate even larger funds, and nice management fees.

“So even if paying or marking up sky-high valuations will make it less likely that a fund manager will ever see their share of earned profit, it makes it ‘more‘ likely they’ll get to raise larger funds – and earn enormous management fees. There’s some deep misalignment here…,” he wrote.

In other words, just like in the healthcare industry, today’s venture world doesn’t register marked-up valuations as a cost for VCs—rather, they are a key revenue driver and a wide open door to new funds and fees. That also means higher operating costs for start-ups across the board.

Footing the bill are employees and early-stage limited partners, or future limited partners—the ones who get stuck paying for the hefty management fees.

Here’s where it becomes with Palihapitiya calls a Ponzi “balloon”, with VCs “marking up Fund IV in order to raise money for more management fees out of Fund V, and so on […]”. The VCs are profiting hugely from the management fees long before a start-up is even successful.

And then startup employees are left holding the bag, too, in a much more dramatic way. This is because of the Silicon Valley trend to pay employees in stock options and restricted stock units.

Palihapitiya says it’s time for a change, and a return to the “roots” of venture investing.

“The real expense in a startup shouldn’t be their bill from Big Tech but, rather, the cost of real innovation and R&D,” he writes.

He also thinks it’s time to do away with the “multilevel marketing scheme that the VC-LP-user growth game has become”.

More to the point, he says, it’s time to let the air out of this “bizarre Ponzi balloon”.

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California Rent Control Ballot Initiative Goes Down in Flames. Free Marketers Should Not Be Too Hasty in Celebrating Its Demise.

Californians walked back from a ledge Tuesday by roundly rejecting a ballot initiative that would have opened the door to more rent control. Some 61 percent of Golden State voters rejected Prop. 10 last night. The initiative would have repealed Costa-Hawkins, a state law limiting the ability of cities to impose rent control on new construction and single-family homes.

The result is not a huge surprise. Polling from the Public Policy Institute of California (PPIC), a non-partisan think tank, showed some two-thirds of voters opposed the measure.

Prop 10’s thumping at the polls is good news for Californians. The consensus opinion among economists, on both the left and right, is that rent control reduces the supply of housing and fuels gentrification by deterring new construction and incentivizing landlords to convert their rental properties into pricier for-sale units.

Still, chalking up Prop. 10’s defeat to voters’ embrace of sensible economics would probably be a mistake.

That same PPIC poll showing widespread disapproval of Prop. 10 also found that rent control in general was quite popular, with 52 percent of likely voters agreeing with the statement “rent control is a good thing.” That included 69 percent of Democrats, 45 percent of independents, and 34 percent of Republicans. Similarly, a USC Dornsife/Los Angeles Times poll from September found that 28 percent of respondents (a plurality in that particular poll) blamed California’s high housing costs on a lack of rent control. Only 13 percent of respondents attributed costs to a lack of housing construction, fewer than the percentage of people blaming things like the influence of the tech sector or foreign buyers.

So why did Prop 10 fail?

Part of the explanation might be the slightly confusing nature of the ballot initiative itself, which would not have actually imposed rent control, but would instead have repealed an obscure law most voters have likely never heard of.

It didn’t help matters that the ballot language for Prop 10 mentions the potential for a “net reduction in state and local revenues of tens of millions of dollars per year in the long term” thanks to a likely fall in property values, and thus property taxes, that would come with any expansion of rent control.

The Yes on Prop 10 folks themselves are blaming the huge amount of money spent by the No campaign.

Real estate interests and developers raised some $75 million for the No on Prop 10 campaign, compared to the $25 million collected by Prop 10 proponents. That gave the No’s a big edge in the information game.

Michael Weinstein, CEO of the AIDS Healthcare Foundation—which has recently gotten into the affordable housing development arena, and contributed some $23 million to the Yes side—pinned the loss on “corporate billionaires” in a post-election conversation with The Los Angeles Times.

Weinstein himself is a controversial figure. The New York Times called him the “the Koch brothers of public health” because of his deep pockets, ideological purity, and history of zealously pursing policies opposed by many would-be allies in the AIDS activism world. Weinstein’s own idiosyncrasies and his willingness to go it alone on Prop 10 reportedly angered many in the pro-rent control camp, dampening their enthusiasm for the measure. Here’s how Joe Eskenazi, a reporter for San Francisco publication Mission Local, wrote about the fissures in the Yes campaign back in October:

“Organizers here have all fallen behind Weinstein’s lead. But, on background, some questioned if this was the right year to for a statewide battle; perhaps a few more years of successes on the local level would have galvanized a movement. Northern California organizers also expressed some frustrations at, essentially, taking marching orders from an ‘egotistical billionaire’ from L.A. writing all the checks.”

It didn’t help matters that Gavin Newsom, the Democrat who won California’s gubernatorial race Tuesday, opposed Prop 10 while also dangling the possibility of legislative action on rent control in the new year. That may have lowered the stakes in the election.

At the end of the day, these factors were enough to see Prop 10 lose in a landslide.

Free marketers who worry about the consequences of expanded rent control should wait to break out the champagne, however. Given broad popular support for rent control, as well as a stated willingness among the incoming governor’s administration to work on compromise legislation in the future, it is likely the specter of rent control will continue to haunt California housing policy for years to come.

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What’s Next For The Bond Market? Wall Street Tackles The “Most Important” Question

As we noted this morning, despite the coming fiscal gridlock, December rate hike odds actually increased this morning ahad of the Fed’s policy decision tomorrow, with two more hikes still priced in for 2019, even as both equity and rate volatility tumble in unison. Meanwhile, despite the sharp decline in rate volatility, the recent stability in the bond market is not seen as lasting long, with a confluence of factors converging to impact the “most important” catalyst behind this year’s instability in risk assets – the 10Y yield – which will likely continue rising after the current period of calm.

There are several reasons for that, among which:

  • Supply Concerns: With the US set to issue over $1.3 trillion in new debt in calendar 2018, investors not only have to digest record-sized Treasury auctions, but accept that much more borrowing is to come. In fact, as some have speculated, a House led by the Democrats raises the specter of possible infrastructure spending, and President Donald Trump has indicated he may be willing to work with them on that. On top of that, recent government bond saleshave already shown signs of weakening demand.
  • Fiscal Deadlines: As Bloomberg noted this morning, money-market traders are bracing for face bouts of volatility as fiscal deadlines loom even larger now, with the next one on deck just one month from now, when on December 7 spending authority under the current continuing resolution comes to an end, threatening another potential government shutdown. After that, the biggest risk next year is for a protracted battle over the debt ceiling.
  • The International “Diversion”: Amid the concerns laid out by some European analysts, Trump’s more limited room for domestic maneuvering could provoke the president to focus on international affairs by intensifying the trade war. That could spur further swings in the Chinese yuan and emerging markets, which could in turn affect U.S. assets.

To be sure, today’s “dismal” 30Y auction already showed that something is not quite right with the bond market when the sale of $19BN in 30Y paper clearly stunned the bond market, and instantly repriced the long end higher in a harbinger of what may be in story in the coming months.

So what happens next? Below is a summary of some of the more notable sell-side views laid out this morning, courtesy of Bloomberg:

  • “The midterms are unlikely to have a significant bearing on the economy,” Capital Economics U.S. economist Andrew Hunter wrote in a note. “But they probably raise the risk that political uncertainty once again becomes the dominant theme over the next couple of years.”
  • “The results of the election shouldn’t change the immediate path of the economy or monetary policy,” independent strategist Marty Mitchell said in a note, citing the Trump administration’s already implemented fiscal initiatives. “For these reasons, the Fed will continue to lift the fed funds rate and the U.S. yield curve should maintain an upward bias going forward from here.”
  • NatWest Markets strategist John Briggs suggests fading the long-end buying in Treasuries, because once the dust settles, market movements will be “more muted” and quickly refocus on the underlying fundamentals and upcoming events. Briggs also said political gridlock may give way to increased spending. “When it comes to budgeting, the only way to agree on a budget may be to give candy to everyone, and spend more rather than less,” he said.
  • “Trade uncertainties, investigations and impeachment threats are downside risks,” Dana Peterson, an economist at Citigroup, wrote in a note. “The persistence of U.S. trade disputes with other economies, including China and the EU poses downside risk to global (and ultimately U.S. growth) via trade, confidence and inflation channels.”
  • Going forward, the removal of uncertainty and realization of the expected outcome should be supportive for risk assets, the yield curve returning to a more normal flattening pattern, and a modestly weaker broad dollar, Goldman Sachs analysts wrote in a note.
  • “With election results in hand and largely in line with expectations, the bond market quickly looks ahead to Thursday’s FOMC announcement,” said Colin Lundgren, global head of fixed income at Columbia Threadneedle Investments. “ No rate hike expected this month, but investors will be looking for language in the statement that highlight the Fed’s concern for changing financial conditions, and potential impact on future policy decisions.”
  • Finally, focusing on the yield curve shape, Wells strategists including Mike Schumacher still expect the Treasury curve to bear steepen by the end of 2018 and into 2019, resulting in more vol on the long end, given midterm election impact on the U.S. bond market typically fades within a week and supply remains heavy. Plus, there’s “little link between Congressional control and spending,” suggesting that for all the posturing, yields may simply continue going up amid concerns for “double deficits.”

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Voters Approve Redistricting Reforms in Colorado, Missouri, Michigan (and Maybe Utah, Too)

Voters in three states—Colorado, Michigan, and Missouri—approved ballot measures Tuesday that will transfer some redistricting authority away from state lawmakers by creating independent commissions for the purpose of redrawing congressional and state legislative district lines after the next census.

The three measures approved Tuesday vary slightly from state to state, but the general consensus across all three states, where the initiatives got more than 60 percent approval, seems to be that voters are interested in trying a new approach to one of the most important and most political aspects of American democracy. (In Utah, a similar ballot initiative to create a redistricting commission remained too close to call on Wednesday afternoon. With 74 percent of precincts across the state reporting, “Yes” had a narrow 4,000-vote lead.)

Colorado’s initiative would create a 12-member commission for the purpose of redrawing congressional districts. Half of the members would be selected by a panel of state Supreme Court justices, and half would be selected by the majority and minority leaders of the state legislature. Speaking of: Rocky Mountain voters also approved a separate ballot question to create a different 12-member commission to redraw state legislative districts. Under the ballot initiatives, the commissions would each include four registered Republicans, four registered Democrats, and four people who “will not be affiliated with any political party.”

That wording seems to exclude members of third parties, something that has rankled the state’s Libertarian and Green parties, as Reason has previously reported.

Michigan’s redistricting initiative would create a similar scheme. The new, 13-member redistricting commission would have to include four Democrats, four Republicans, and five independents or members of third parties. Passing a new redistricting plan will require the approval of at least seven members, including at least two Democrats, two Republicans, and two of the other members.

Missouri’s redistricting reforms were included in an omnibus ballot question that also included changes to the state’s lobbying laws and imposed campaign finance restrictions for state legislative candidates. The measure creates a new, nonpartisan position known as the state demographer, who will be appointed by a consensus of the state auditor and Senate leaders from both parties. The state demographer will provide a series of redistricting options for state lawmakers to choose between—rather than allowing legislators to draw their own.

Limiting redistricting is a worthwhile project that could produce more competitive House elections and help nudge American politics away from the fringes. When so many districts are carved to give one party or the other a clear advantage, it makes low-turnout primary elections more important and encourages politicians on both sides to pander more to their own parties’ outer flanks than to the ideological middle, where most voters reside.

That said, handing redistricting power to a so-called independent commission is not a foolproof strategy for fixing gerrymandering.

The same political pressures that cause state lawmakers to draw districts that favor one major party or the other are still present, and some redistricting commissions have actually done a worse job of drawing competitive districts that the state legislatures they replaced. Who ends up being appointed to those commissions, how they are picked, and what oversight (from courts, for example) exists are probably more important than the simple fact that a commission has been created.

Several other states—most notably California, Arizona, and Iowa—experimented with redistricting commissions in 2010, and legal challenges to legislative-drawn maps in Pennsylvania, Wisconsin, and North Carolina reached the Supreme Court last year, further raising the profile of redistricting battles.

It also won’t put an end to partisan complaints—primarily from Democrats—about the makeup of House districts. It’s true that gerrymandering played an important role in giving the GOP an advantage in House races since 2012, but other geographic factors—like the fact that Democratic voters tend to be concentrated in cities—would give Republicans an advantage even if all districts were more compactly drawn.

That’s not an argument against mechanisms that result in more compact districts, of course, but merely a function of the fact that the two major parties have essentially divided along urban/rural lines.

Still, it probably makes sense to remove that power from the direct control of state legislatures, particularly in places where they have wielded it irresponsibly. Doing so may, in some small way, increase the level of trust the public has in the redistricting process.

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Goldman Promotes Only 69 New Partners, Smallest Class Since IPO; One Third Are Millennials

Goldman Sachs today announced the promotion of 69 employees to partner, traditionally considered one of the most prestigious roles on Wall Street.

Unlike prior years when the title had been somewhat diluted when the bank was handing out the rank like hot candy, this year Goldman was far more selective in who it elevated to the top company rank. The promotions, which take place every two years, were down from the 84 appointed in 2016, and were the lowest since the bank went public in 1999.

Within the details of new promotions provided by the bank, one stood out: of the newly promoted partners a whopping 29% were Millennials.

As the WSJ previously reported, Goldman’s new CEO David Solomon had been pushing to shrink the size of partner classes, partly because Goldman has been hiring more partners from outside the bank. Furthermore, in what was arguably the most diverse class yet, of the new partners 26% are women, the highest proportion in the firm’s history. Last time, women accounted for 23% of the class.

The full press release is below:

Today is an important day for our culture and our people as we welcome a new class to the partnership. This talented group of individuals – representing the best of Goldman Sachs – will join our current partners in guiding, advising and inspiring our people to action on behalf of our clients and our firm.

The Partner Class of 2018 is smaller than in recent years, highlighting the aspirational nature of the partnership. In addition, we are pleased that this year’s class includes the highest percentage of women and black partners in our history.

We expect that each of these individuals will continue to serve as role models to our people in advancing the Goldman Sachs franchise by providing superior client service, driving long-term shareholder returns and demonstrating the highest level of dedication and integrity.

These decisions are extremely difficult, and we acknowledge the hard work of those who were not selected this year. We are confident that many of them will be named partners in the future.

Congratulations to the Partner Class of 2018.

Some more details from Bloomberg:

  • Partners, known as participating managing directors, typically receive a $950,000 salary and the opportunity to invest in private funds without fees.
  • Still, life doesn’t get easy after reaching the partner level, where turnover can be high. More than a third of the bank’s partners in 2014 have since left.
  • Twenty-eight of the new partners work in the trading division and 21 in investment banking. Only 1 new partner is from the bank’s risk division.

And in its pursuit of diversity, some 29% of the promoted partners were Millennials as Goldman disclosed in this infographic.

 

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Space Force: The Real Loser From Yesterday’s Election Results?

Last night’s midterm election results may have been hyped up a great deal, but there actually weren’t a whole lot of surprises. Democrats took back control of the House, as most pundits thought they would, while Republicans—again, as predicted—kept the Senate.

Reason‘s Peter Suderman explained how the “biggest shock” was that things “went more or less as expected,” while Eric Boehm argued that “the return of divided government” is actually a good thing. President Donald Trump may have boasted of a “very Big Win,” but in reality, neither Republicans nor Democrats can claim total victory.

That said, one of the biggest losers from Election Day could be Trump’s proposed Space Force. In case you’re not familiar with the idea, Trump announced in June the creation of a Space Force as a co-equal sixth branch of the military meant to project U.S. dominance into, well, space.

In July, I reported on how the Pentagon was moving forward with the idea, even though Congress had yet to approve it. Fast-forward almost four months, and Congress still hasn’t authorized a Space Force, though the Defense Department is supposed to send Congress a plan in February for how the new branch would work.

But with Democrats about to hold a majority in the House of Representatives, the Space Force might be put on hold.

“Space Force is the victim of having been an idea advanced by President Trump, so I don’t even know that it will get a real hearing on the merits in the House,” Thomas Spoehr, the director of the Center for National Defense at the conservative Heritage Foundation, told the Washington Examiner.

As Military.com notes, Rep. Adam Smith (D–Wash.) is likely to take over chairmanship of the House Armed Services Committee from Rep. Mac Thornberry (R–Texas). Thornberry hasn’t publicly supported or opposed the Space Force (he wants more information first). Smith, however has been a vocal opponent of the idea.

“I am concerned that [Trump’s] proposal would create additional costly military bureaucracy at a time when we have limited resources for defense and critical domestic priorities, and I do not believe it is the best way to advance U.S. national security,” Smith said in September. “We must do a better job of dealing with space as a national security priority. I will continue to work toward a smarter, more effective approach.”

Smith does support the creation of a Space Corps that’s part of the Air Force—a kind of compromise solution that Todd Harrison, a senior fellow at the Center for Strategic and International Studies, thinks Democratic control of the House could mean more of. “We are going to see that more and more when it comes to defense issues with Dem control,” Harrison told Investor’s Business Daily. “How do you pay for these things, looking at a fiscally constrained budget?”

A separate Space Force, meanwhile, would indeed come at a high price. A September Pentagon memo estimated that it would cost roughly $13 billion its first five years. Deputy Secretary of Defense Patrick Shanahan said it would employ about 20,000 people, including military and civilian workers.

That high cost that could doom the Space Force, at least for the time being. “Even a lot of the people who are advocates for doing a Space Force are concerned that the way the department goes about creating another service could kind of ‘gold-plate’ the idea and lead to something that is too costly and beyond what is needed,” Hunter told the Examiner.

That’s probably a good thing. Reason‘s Christian Britschgi has pointed out that some of Trump’s own defense advisers—like Defense Secretary James Mattis and Air Force Secretary Heather Wilson—have previously opposed the idea.

And rightly so. The U.S. military already has plenty of entities that deal with space, including the Air Force Space Command, which employs about 36,000 people. Is there really a need to make the Space Command larger, or to add to the alphabet soup of government agencies?

Plus, even without the Space Force, the Pentagon wastes about $125 billion a year on administrative inefficiencies. That number will likely just go up with the addition of a sixth branch of the military.

That’s not all. As Britschgi wrote:

A huge new military bureaucracy dedicated to space would inevitably have to draw from the same talent pools that our burgeoning private space industry does. Every engineer, scientist, or pilot recruited into the Space Force means one fewer civilian figuring out how to send tourists to low earth orbit, to create research bases on Mars, or to set up strip mines on the moon.

There are a host of reasons why the Space Force is a bad idea. If yesterday’s election results doom the plan or even just put it on hold, then that’s probably for the best.

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The Clock Is Ticking For China’s Oil Independence

Authored by Tim Daiss via Oilprice.com,

China is pulling out all stops in order to increase its oil and gas production, but at the end of the day it will likely not be enough to stop the world’s second largest economy from becoming over reliant on geopolitically charged crude oil and natural gas imports.

On Monday, state-run Chinese oil majors CNPC and Sinopec, also Asia’s largest refinery, said they were speeding up drilling and exploration from major tight oil and shale gas formations in the country’s western regions. CNPC also said that new exploration in shale gas, tight oil and tight gas will lead to growth in production for the country’s largest oil and gas producer.

The company added that the drilling cycle at the Mahu field in Xinjiang, one of CNPC’s largest findings in recent years, fell around 40 percent the previous year. A Reuters report said this implies that oil wells are being completed and produced at a faster rate.

Race against a ticking clock

China’s ambitions to develop more of its own oil and gas reserves is a race against a ticking clock. The middle kingdom has already bypassed the U.S. to become the world’s top oil importer, with much of those oil imports having geopolitical strings attached. China is the largest importer of Iranian oil, and that resource is being jeopardized by fresh U.S. sanctions against Iran’s oil sector that went onto effect on November 5. China is also reliant on both Russia and Saudi Arabian crude and just recently pared back crude imports from the U.S. amid ongoing trade tensions between Washington and Beijing.

China’s dilemma in its gas sector is just as perplexing. The country bypassed South Korea late last year to become the world’s second largest liquefied natural gas (LNG) importer, with projection that it will even pass Japan as the top LNG importer at the beginning to mid part of the next decade, a development unimaginable just two years ago. China’s insatiable gas demand comes as the government mandates that gas, amid record air pollution levels, particularly in its major urban centers, make up at least 10 percent of its energy mix needed for power generation by 2020, with more earmarks set for 2030.

Yet, China’s growing oil dependency will create the most problems for Beijing as it is forced to continue to rely on the U.S. to safeguard global shipping lanes. However, that possibility would take acquiesce on the part of both the White House and Pentagon that China’s blue ocean navy was indeed developed enough and trustworthy enough to share that decades old responsibility shouldered solely by the US Navy.

What China needs to offset both its growing oil and gas dependency is more domestic production, but therein lies the problem. China’s oil fields are maturing and it’s unlikely that significant discoveries can be found to replace depletion reserves. Around five or six years ago, Beijing pegged its hope on emulating the US shale oil and gas success story, even cutting deals with American firms to help develop China’s shell formations. However, unlike most US shale formations, China’s are in difficult reach, rugged terrain, indicating that shale oil and gas will not offer the solution that Beijing energy planners needs, at least in the foreseeable future.

The way out going forward for China is to diversify its oil and gas supply mix as much as possible and continue to reach global joint development agreements with both national and international oil companies, an art that hydrocarbon deficient Japan, the world’s third largest crude oil importer, has executed brilliantly for decades.

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It’s Time for Congress to Acknowledge the Collapse of Pot Prohibition

Yesterday’s election results show that pot prohibition is continuing to crumble across the country. The number of states that have legalized recreational marijuana rose from nine to 10, and the number allowing medical use rose from 31 to 33. The former group now includes Michigan, the first state in the Midwest to allow recreational use, and the latter group now includes Missouri and Utah. Counting Oklahoma, where voters approved medical marijuana in June, three red states have taken that step this year.

These races were not close. Legalization won in Michigan by nearly 12 points, while the medical marijuana measures won by 14 points in Oklahoma, by more than six points in Utah, and by 31 points in Missouri.

The healthy margins are not surprising given the general popularity of these policies. According to the latest Gallup poll, two-thirds of Americans think marijuana should be legal for recreational use. Support for medical marijuana is considerably higher: A Quinnipiac University poll conducted last April put it at 93 percent. “At this point,” Marijuana Policy Project Executive Director Steve Hawkins noted last night, “medical marijuana may enjoy more public support—and more bipartisan support—than virtually any other policy issue still up for debate.”

The only defeat for marijuana reform last night came in North Dakota, where voters just two years ago approved medical use by a whopping 28-point margin. They clearly were not ready to take the next step, although two-fifths of them said yes to a sweeping ballot initiative that aimed to legalize all peaceful marijuana-related activities (except for sales to minors) and create a system of automatic expungement for people convicted of such offenses.

Michigan is the third most populous jurisdiction (after California and Canada) to legalize recreational use so far:

Nearly one-quarter of Americans currently live in a jurisdiction that has legalized recreational use.

This map from Governing magazine shows what marijuana policy looks like in the United States as of today:

Of the 20 states where voters have the power to pass legislation by initiative, 16 have already legalized marijuana for medical or recreational use. The four that have not are Idaho, Nebraska, South Dakota, and Wyoming. Seven other states have legalized medical but not recreational marijuana: Arizona (where a legalization intiative failed in 2016), Arkansas, Missouri, Montana, North Dakota (where a legalization initiative failed yesterday), Ohio (where a legalization iniative failed in 2015), and Oklahoma.

While there is still considerable room for liberalizing marijuana policy by initiative, the focus increasingly will shift to legislatures in states such as New Jersey, New Hampshire, and New Mexico. So far Vermont is the only state that has legalized recreational use (but not commercial production and distribution) by that route.

At some point, Congress will have to officially recognize what’s going on by reconciling federal law, which still prohibits marijuana in any form for any purpose, with state laws that tolerate medical or recreational use. The most straightforward approach I’ve seen is the Respect State Marijuana Laws Act, a one-sentence bill sponsored by Rep. Dana Rohrabacher (R-Calif.) that makes the federal marijuana ban inapplicable to anyone acting in compliance with state law. I was on a drug policy panel with Rohrabacher last week at Reason‘s 50th anniversary celebration, and he seemed confident that President Trump, who has repeatedly said states should be free to set their own marijuana policies, is prepared to sign that bill or something similar.

The chances that such a bill will get through the House have improved since yesterday. “This was the first election in our lifetimes where the federal results were more important than the state results, from the perspective of marijuana policy nationally,” Marijuana Policy Project co-founder Rob Kampia writes. “The Democratic takeover of the U.S. House was the most important outcome, because the House speaker, committee chairs, and subcommittee chairs will all be Democrats for the first time since 2010, with a majority of Democrats populating literally all House committees and subcommittees. While members of Congress in both major parties have become increasingly supportive of good marijuana legislation, approximately 90% of Democrats—and only 25% of Republicans—support such legislation generally.”

Emblematic of this shift was the defeat of House Rules Committee Chairman Pete Sessions (R-Texas), an unreconstructed drug warrior whom Kampia calls “the sphincter who has constipated all marijuana bills and amendments in the House in recent years.” Sessions was defeated by Democrat Colin Allred, a medical marijuana supporter who has criticized Sessions’ anti-pot prejudices.

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