Friday, September 4, 2015

The High Price of Cheap Oil

“The oil industry, with its history of booms and busts, is in a new downturn,” said Clifford Krauss in The New York Times. The price of oil closed at $44.10 a barrel on September 1 for the first time since 2009, a 60 percent plunge from its peak last year. The explanation “boils down to the simple economics of supply and demand.” The world is awash in crude, with U.S. oil production doubling over the past six years. Meanwhile, the economic slowdown in China, the world’s largest oil importer, and sluggish growth in other developing countries are crippling demand. There’s no end in sight for the global oil glut. Lower prices mean even more pressure on oil-producing countries to pump to make up for lost revenues. Saudi Arabia, Russia, and Iraq are pumping as many barrels as they can in order to defend their market share, in a battle that’s looking increasingly like “the energy-industry version of trench warfare.”

At first look, $44-a-barrel oil sounds like a beautiful thing. American consumers get cheaper gas, businesses benefit from lower energy bills, and automakers sell more vehicles, especially gas-guzzling trucks and SUVs. But there’s a price to pay for all this cheap oil. Employment in the 500,000-person U.S. oil and gas industry will take a hit as energy companies scale back operations. Cheap, plentiful gasoline could also derail work on alternative fuel sources like solar and wind. Jobs are already being lost in the energy industry around the world. Last week, Royal Dutch Shell said it would eliminate 6,500 jobs worldwide in response to collapsing crude prices. Because such layoffs tend to lag market prices, more job cuts could be on the way.

In Texas, cash-strapped oil companies are already shifting into survival mode. Companies are slashing costs by putting hundreds of rigs into storage and canceling expensive projects, including deep-water drilling and oil sands extraction. Gone are the days of frenetic growth, lavish spending, and frantic hiring sprees. The one bright spot: Companies that survive will emerge leaner and more cost-conscious, focused on safer bets in areas with proven resources.

The most dramatic consequences of the oil bust will unfold beyond U.S. borders. When a similar drop happened in the 1980s, the Soviet Union collapsed. Countries that rely on oil revenues are “facing a fiscal reckoning” that could fuel unrest. Venezuela’s socialist government has long been propped up by oil, which makes up 96 percent of its exports. Vladimir Putin’s reign has coincided with a steep rise in oil prices, but Russia’s economy is expected to contract 3.4 percent this year. Saudi Arabia, where the royal family spends oil revenues lavishly to preserve its legitimacy, now faces massive budget deficits. Cheap oil may be a boon for consumers, but it will create more uncertainty in an already uncertain world.

COLLEGE CHRONICLES - DISCOUNT RATES RISING: The average private four-year college covered 48 percent of their institution's advertised tuition and fees in 2014-15, up from 43.4 percent the year prior, according to an annual study from the National Association of College and University Business Officers. The 48-percent tuition discount rate is the highest in the study's 21-year history. In an effort to attract more students, colleges continue to increase their discount rates (resulting in lower net tuition revenue) across the board, the survey found. The average discount rate - defined by NACUBO as institutional grant dollars as a percentage of gross tuition and fee revenue - reached 41.6 percent last year for all undergraduates, up from 39.8 percent in 2013-14. The 411 private colleges surveyed provided slightly more students with financial aid, too. Nearly 90 percent of first-time, full-time freshmen and 77.1 percent of all undergraduates got institutional grant aid in 2014-15, including scholarships, fellowships and other grants that covered an average of 54.3 percent and 48.9 percent of tuition and fees, respectively.

Congrats to the University of La Verne and their annual golf fundraising tournament, the event raised $80,000 for their scholarship funds. Here is a picture of a distinguished group of golfers from left to right; Hal Assel, Adjunct Professor of Marketing; Catherine Abbott, current student; Allison Krich, Adjunct Instructor Kinesiology; Chris Krich, Head Football Coach; Devorah Lieberman, POTULV; Unidentified golfer; Mark Jebbia, current student; Jeff Bracken, Group VP & General Manager Lexus Division Toyota Motor Corporation.

BIG EIGHT O - Social Security turns 80. The Peter G. Peterson Foundation has some charts to mark the occasion like this one showing Social Security is expected to run a cumulative cash deficit of $2.8 trillion between now and 2034:

AUTO LOANS ENTER $1 TRILLION CLUB - The amount of auto loans in the U.S. has passed the $1 trillion mark for the first time, joining student loans: With the recession now six years behind in the nation's rearview mirror, lending for automobiles has sharply accelerated: Around $119 billion in auto loans were originated in the second quarter of this year, a 10-year high, according to figures from the Federal Reserve Bank of New York released Thursday.

GAME CHANGE - "Biden strategy for White House run taking shape: 'I think he's getting closer to saying yes,' one Biden ally says: With his blessing, confidants to Vice President Joe Biden have begun strategizing about travel to early primary states and identified potential donors who could bankroll a campaign even as he remains undecided about whether to pull the trigger on a late-entry 2016 run for president. ... Biden's strategy ... would be to focus on South Carolina while almost writing off New Hampshire, where both Hillary Clinton and Bernie Sanders have considerable footholds.

Biden proxies have also homed in on rich supporters who could help finance a run through a super PAC - in particular, Baltimore Orioles owner Peter Angelos, a past top donor to both Joe and Beau Biden, whom Democratic operatives noted has not yet given to the Hillary Clinton-backing Priorities USA Action ... Biden allies also have set their sights on Geocities founder and tech investor David Bohnett, a longtime Democratic donor. Angelos didn't return a call for comment. ... There is significant operational planning going on around him.

The final call ... is expected to be made at a meeting [not yet scheduled] of the vice president's closest circle of advisers at his home in Wilmington, Delaware; they are likely to include chief of staff Steve Ricchetti, Mike Donilon, former Sen. Ted Kaufman, Larry Rasky and Tom Donilon, along with Biden's son, Hunter, and his oldest and closest political adviser, his sister Valerie Biden Owens. Ricchetti and Mike Donilon have been involved with many of the discussions going on already.

After enduring months of ridicule fueled by Donald Trump, whose frequent outrageous comments have forced a number of GOP rivals into a corner, and as a seemingly endless parade of Republican contenders have jumped into the presidential race, there's a sense of relief at the idea of Biden mounting a late-in-the-game run and mixing up the Democratic field.

Days until the 2015 election: 61. Days until the 2016 election: 432.

MADE IN CHINA: THE NEXT GLOBAL RECESSION? - The policy panic in Beijing over its currency and the fall of its stock market suggest that the next global recession likely will be made in China. The problem is that China's economic rise of late has been facilitated by a massive and unsustainable stimulus campaign, no emerging nation in recorded history has ever tacked on debt at such a furious pace as China has since 2008, and a rapid increase in debt is the single most reliable predictor of economic slowdowns and financial crisis.

So before you start talking about how this is "like 2008" remember that it isn't. At all. It's an equity price decline following a big run-up in valuations. There is no huge underlying debt bubble ready to pop with horrific consequences. The U.S. economy still looks pretty decent though a rising dollar, an ill-timed Fed rate hike and hits to consumer confidence from scary stock market headlines could still tilt things the wrong way.

BIRTHDAYS THIS WEEK – Birthday wishes and thoughts this weekend to: Frank Robinson (79) Tucson, AZ., John McCain (79) Phoenix, AZ., Dr. Phil McGraw (65) Beverly Hills, CA., Jessica Naccache ….famous financial consultant, Itzhak Perlman (70) New York, NY, Tom Ridge (70) Latrobe, PA.,  Shania Twain (50) Maui, HI. 

SPORTS BLINK - Vin Scully to return for record 67th year with Dodgers, The Dodgers ... revealed the news last Friday night in the second inning... Magic Johnson, a co-owner of the team, appeared on the Dodger Stadium video board to tell the crowd that Jimmy Kimmel had a major announcement. ... The 87-year-old Scully stood up and waved from his booth as the crowd cheered. The Hall of Fame announcer's consecutive years of service make him the longest-tenured broadcaster with one team in sports history. ...

Scully calls all nine innings of the team's home games and road games in California and Arizona for the Dodgers' television home on SportsNet LA, while the first three innings of his games are simulcast on the radio. ... A dispute between Time Warner Cable and other cable [companies] now in its second year is keeping 70 percent of the [L.A. TV] market from seeing the team's games. ... Even Scully can't watch road games because he lives in an area not served by Time Warner.

Scully began his ... career in 1950 with the Brooklyn Dodgers. He has called three perfect games, 25 World Series and 12 All-Star games. He was behind the microphone for Kirk Gibson's Game 1 homer in the 1988 World Series, Don Larsen's perfect game in the 1956 World Series, Hank Aaron's record-setting 715th home run and Sandy Koufax's four no-hitters, including a perfect game.

COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 9/5, 5:00 PM ET, ABC: #20 Wisconsin Badgers (0-0) vs. #3 Alabama Crimson Tide (0-0); first game, first upset, Badgers 32 Tide 24, thank you!  Season to date (0-0)

SMALL COLLEGE FOOTBALL PICK OF THE WEEK – Saturday 9/5, 12:00 PM ET, HGTV: #19 St. John Fisher Cardinals (0-0) visit #23 Thomas More Saints (0-0), early season matchup between the E8 and the PAC Conferences: we like the Cardinals in a road victory 24 – 21. Season to date (0-0)

Rink Rats NFL Preseason Picks

East – Cowboys                     North – Green Bay                South – Carolina       
West – Seattle            Wild Cards – Philly and St. Louis                
Conference Champion – Seattle Seahawks

East – New England  North – Baltimore                 South – Indianapolis
West – Denver           Wild Cards – Houston and Pittsburgh
Conference Champion – Indianapolis Colts

Super Bowl Champion – Seattle Seahawks


(NCAA, Sept. 5) #13 UCLA Bruins (0-0) at Virginia Cavaliers (0-0): The Swami likes UCLA in a close one; 28 – 24.

(NCAA-SCIAC, Sept. 5) George Fox Bruins (0-0) at University of La Verne Leopards: Now is the time for The Leos; 35 – 24.

(MLB, Sept. 5) Pittsburgh Pirates (79-53) at St. Louis Cardinals (86-47): two National League powers; Red Birds win 4 – 3.

Season to date (64-34)

Next week: Words of the month and Dear Rink Rats.

Until Next Monday, Adios.

Claremont, CA
September 4, 2015


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