Negative Oil – by BGE


Negative Oil – by BGE

All sorts of impossible things happen all the damn time on Wall Street.  Negative interest rates? Pay for the privilege of lending money, crazy talk.   Well, right now you would pay Germany 0.436% per year for the privilege of lending them money for ten years.  There’s a good reason for this, but it seems mad.  On Monday, 20 April 2020 the price of oil, or to be accurate May 2020 WTI, went negative.  At one point, you would be paid $38 to take a barrel of oil off a desperate speculator.  How did this happen?  Well, there are real supply and demand reasons that prices are low — the lockdown, Saudi Arabia vs Russia – but the reason they went negative is that we are talking about paper oil not physical oil.

I’m not an oil guy, or a commodities guy, I’m a credit guy, but futures are ubiquitous in the markets.  When we speak of oil prices we are not speaking of what you pay to take possession of a barrel, we are talking about a benchmark futures contract price. Futures are financial derivatives that oblige the buyer to buy or sell some underlying asset at a predetermined price and date.  They can be contrasted with options, which are financial derivatives that give the right, but not the obligation, to buy or sell.  There is a futures market for just about anything that is delivered in the future: corn, oil, pork bellies, stocks, bonds. Futures are standardized, trade on exchanges, and are regulated by the CFTC. There’s a thing called a Forward, which is like a future, but is traded over-the-counter with custom terms and conditions.

Futures are used by sellers (e.g., oil producers or farmers) to hedge the price of an underlying asset to prevent losses from a decrease in price.  They’re  used by buyers (e.g., airlines) to prevent losses from a future increase in price.  They’re used by investors (I’m going to call them investors since the distinction between investment and speculation is in the eye of the beholder,  like scholar) to speculate on the direction of prices, either up or down, using leverage.  If you ever “locked in a rate” on a home mortgage, you’ve basically entered into a futures contract (ok an option.)  Essentially, the hedger is transferring the future price risk to the speculator  This is a zero-sum financial transaction, but not a zero-sum social transaction, since both sides gain.  The hedger benefits from the locked in price and the speculator benefits from, or is damaged by, the volatility.

There are a couple of terms that you need to know.  The spot is the price of a fixed quantity of an asset delivered at a specific place, right now.  Backwardation is when the futures price of an asset is lower than the spot and is often a sign that investors expect the price to fall over time.  Contango, a word much loved by word nerds  is when the futures price is higher than the spot and can be a sign that investors expect prices to rise but is usually associated with the cost of carry (e.g., storage, spoilage.)  Markets tend to be in contango, but prices usually converge to the spot as the contracts approach expiration.

Contango can be weird.  It can cause a bet on rising oil prices into a loss, even though prices increase, if it is steep enough.  Not long ago, contango in oil was so severe that investing in the front month created a 15% monthly headwind.  Oil had to go up more than 15% for you to profit.  Some financial advisors will tell you to include a small commodities position to “hedge your life.”  Good advice, but the ETF’s available to the average person won’t work because of contango. Caveat emptor.  I’ll come back to this since it’s a contributor to the negative prices.

Last bits of background.  Most investors are not interested in delivering or receiving the underlying asset.  What they’re interested in is profiting on the changes in price. Thus, most contracts are closed before expiration, which is usually the third Friday of the month, but May 2020 WTI closed on Monday.   These contracts usually contain a provision to roll the contract forward.  Most investors buy on margin. That is, they use borrowed money.  The initial margin  can be only a few thousand dollars to control 1000 barrels of oil.  If the position starts to lose money, the broker will ask the investor for more money to cover the loss. If the investor doesn’t do so fast enough, the broker sells out the position and the investor has to make up any loss.  This is called the maintenance margin.  These, and the notions of limit up and limit down, which I won’t cover, are key things that make futures very volatile.  The position doesn’t have to move very much to cause large losses.

To oil. Most people think the price they see in the papers is the price of oil.  Nope, there is no “price of oil.”  Oil has different grades, different storage requirements, different everything.  A barrel of oil delivered in NY Harbor is different from a barrel of oil delivered in Bahrain.  A barrel of oil from the North Sea is very different from the sludge you get from Mexico and Venezuela.   What you see in the papers is the price of the “front-month” oil futures contract trading on the NY Mercantile Exchange for a barrel of West Texas Intermediate grade oil delivered on a specific date at Cushing, Oklahoma.  Phew. This is the US oil price you see in the papers. You might also see something called Brent Crude, which is the same sort of thing for North Sea oil.  There’s something called spot, but it isn’t very important to the markets. The US Energy Information Administration (EIA) collects weekly spot and future prices from all over the world, so you can see what this means if you’re interested.

Demand for oil has collapsed because of the lockdown.  At the same time, OPEC has been breaking up and Saudi Arabia and Russia entered into a mutual destruction pact to increase production.  The conspiracy theory is they did it to wreck US production since the US becoming a net oil exporter is the most important strategic event since the fall of the Berlin Wall.  We don’t have to keep the Strait of Hormuz open, we just have to be able to close it.  In any case, there’s oil sloshing about all over the place.  Tankers are sitting fully loaded  and Cushing, OK is about 2/3 full.  It’s very difficult to turn off an oil well and, if they have no place to put it, they’ll have to burn it off.

Let’s go back to two things from above.  First, most of the trading in oil is done by professionals who buy or sell the futures contracts themselves all day every day.  However, there are also Oil ETF’s, that allow an investor to buy into this market without being a professional.  They are derivatives of a derivative in fact.  Nothing wrong with this per se, but there had been a large flow of funds into these ETF’s by individuals and hedge funds.  A pro will hedge his position, but the ETF’s have tended to be one-way bets.  Second, these ETF’s tend to invest in the nearest date contract, in this case May 2020, which expired on Monday.

There are all sorts of monkeyshines around expiration dates as the traders try to shove the prices around.  In a leveraged trade small changes can lead to big pay-offs.  Some of that was in play here, but what we had  was what is called a “crowded trade” where there are too many people who have made the same bet.  If that bet goes wrong, you get a rush toward the exits and, occasionally you get the Triangle Shirtwaist Company fire.

There were a lot of outstanding long-contracts and those holding them had to either take delivery or sell the equivalent amount of oil, (i.e., pay someone else to take it.)  There are few buyers of oil, that’s what dropping prices mean, so selling was difficult to impossible and the investors typically have no ability to take delivery – space in Cushing does no good to a trader in NY.   The pro’s knew this, so they shorted the contract, driving down the price and forcing the longs to sell at still lower price, which caused a spiral down in price.  You might have heard of a short squeeze, this is a long squeeze and contango gone wild.

At the end of the day none of this really matters. This was a problem in paper oil, not oil. Some hedge-funds lost money and some got wiped out, we’ll see over the next couple of days. But, Brent didn’t do this, shares in Exxon barely budged on the day and are up today and the June 2020 WTI contract is selling for about $15.   Once the lockdown ends and demand returns the storage issue will ease and this will become a Wall Street legend like the day the Hunt’s tried to corner the market or the Crash of ’87.  It does illustrate the only eternal Wall Street wisdom, no-one knows nothin, and is  an object lesson that you should always understand what you’re buying.

Caveat Emptor





128 thoughts on “Negative Oil – by BGE

        1. I’m sure you can.


          To paraphrase the old joke, do you get them when you demand them?

          (His eyes are awful big and blue, and somehow the CATS taught him puppy dog eyes.)

    1. It’s a hard way to make money. Back in 2008 they were blaming the speculators in ETFs for driving prices up and now they’re getting blamed for driving prices down. The thing is, there are very few “old” speculators in commodities. I think of what they say about pilots, there are old pilots, and bold pilots, but there are no old, bold pilots.

      There’s a poker strategy called grinding, where you only bet when the odds are in your favor, don’t lose much and take small profits. That’s the way the pros make money in commodities.

      1. No doubt. Still, there will be a lucky few that profit off of this. Lucky, because I don’t think there’s anyone with a crystal ball accurate enough to *know* they are making the best choice.

        It won’t balance the damage done to the economy as a whole, and absent some things on the regulatory/legalistic side there will be industries that take longer to recover. The question on the political side is will it recover enough and in time to affect the next election cycle- or will there be another setback that tilts the odds the other way. As things are going now, it seems unlikely that it will be calm seas and following winds till November.

        1. Where is the economic damage as a whole on this one? The investors who lost their shirt? Unless you can show loses to non-investors, such as stopped production, burned off oil, refinery shutdowns, etc, I’m not sure what the economic damage is? If anything, it should correct a misapplication of capital, which is good for the economy.

          1. There was no economic damage from this, it was expiration day monkeyshines in a thin market. The rest of the markets went on unconcerned, Big thing in the papers though and lots of politicians showing why they couldn’t hold a real job.

            The best indication that WuFlu is ebbing is that all the prestige press have been talking about how it changes everything, how life will change irrevocably. They are always wrong. There’s a Thing called the Time Magazine cover effect. Goes back to a famous Time cover talking about the death of equities, which then went on a bull market that lasted essentially for 18 years. They then had a cover saying it would go on forever followed by the tech bubble crash and, my favorite, the Committee to save the World with Greenspan and Summers and Reich. Right before the Mortgage Bubble.

            Whatever those idiots say, do the opposite, be patient, and prosper. They couldn’t find their a$$ with both hands given a mirror and a map.

          2. The paper problem, probably not. But the supply glut underlying it, yes. Will see if get proctology from tax comission next 3 years since oil’s getting hammered. They really want to get hands on the tax credit we had. Know 5 or six people that got hit up for money for bs.

            1. Ah, well, that’s a different issue. I thought you were specifically commenting on the paper. The glut is probably a preview of several things we’ll see glut in the next decade or two as the baby boom starts dying off.

              1. This is very important. None of the economic or financial models deal with demographics properly. US Demographics are about the best, but best does not mean good, Europe, Korea, Japan, Brazil even, have poor age pyramids with a shortage of persons at peak productivity. China is entering the biggest demographic catastrophe ever that wasn’t caused by war or plague.

                I was at a conference years ago where the speaker answered why US output was higher than Europe. He showed a picture of his children and said we had ‘em and you didn’t.

                1. And the latest plague will have minimal effect on China even if the highest figure bruited about are true.

                  1. Well, even with the gender bias in victims it didn’t solve their demographic problem, but it sure was a great opportunity for the security services to head out and disappear troublemakers, especially including in HK.

                    Once it was clear to their internal tracking that this was not the zombie apocalypse, the CCP was not one to let global distraction go to waste.

              2. Referring more to the oilfield effects. Ok had tax credits that I used but since oilfields getting hit even without kung flu they’re gonna be searching couch cushions

            1. One Paul Graham has said something similar about founding a startup, or at least, getting in on one early. It’s a lot of crazy work, and there’s a lot of risk up front, but if you succeed and sell off your company (or pass the reigns on to the next generation of leadership) you trade “work hard and risk a lot now for lots of money immediately” for “work 40-hour weeks and slowly make lots of money over a lifetime”.

              While there may be some problems with the notion, I think there’s a lot of truth in it, too.

              1. BTDTGTTS on startups, though not a successful one that rung the bell and got sold off. The thing is, startups are a times-at-bat game – the winners tend to be the ones who have done it most. When you run the odds and figure out how many worker-bee-startup positions you have to suffer though to satisfy those odds, a cubical job where you don’t have to buy Costco pallets of antacids and get benefits and stock purchase plans and stuff looks oh so much more attractive.

      2. My dad was involved starting in the early 80’s on computer modeling of the Futures and Options markets for commodities at the Chicago Mercantile Exchange. The company he was working for was doing that grinding sort of trading. His models weren’t trying to figure out where the market was going in a couple months, or even next week. It was trying to predict the next 15-30 minutes!

        Buy 500k barrels of oil futures now, sell it 10 minutes later for 0.5 cents (0.005$) more a barrel and make 2.5k$ in 10 minutes, then turn around and do it again and again and again all day long so after an 8 hour shift you made 75k$ profit using the same initial cash 30 some times. The head of the company referred to it as picking up nickles and dimes in front of the moving bulldozer of the market in a Wall Street Journal article about the company.

        That was still in the days of Open Outcry Trading before it was all computerized. Now its done a lot faster using algorithms running on super fast hardware as close to the Exchanges computers as possible because the time needed for signals to move at the speed of light through the wires/fibers actually matters…

  1. After reading that, Havelock Vetenari’s insistence that there exist storage capacity for the future items speculated about, just in case, doesn’t seem all that bad an idea – make people think.

      1. The problem with futures is that they are absolutely necessary and useful; so the people ranting about them as the root of all evil are wrong. But they are also ripe for…… issues…. if mismanaged.

        Which would be just fine if investors weren’t so often ensconced in the economic clouds right next to all the other dumkopfen.

        1. Most of the people complaining about futures have no idea wha they’re talking about. I hope I got their social usefulness across.

          The other thing people complain about is short selling. That drives me crazy. It’s no more legitimate to bet on something going up than it is on going down. It’s short sellers who
          “Put in the bottom” when they start to buy to cover.

          Wall Street vs Main Street is really about corrupt politicians and the FRB putting in policies that allow Wall Street to privatize gains and socialize losses. Put a few bankers in jail and the abuses stop, for a while at least.

          1. As someone who ascribes to “Austrian economics”, I have a strong belief that pricing things is communication. When someone shorts some stock, it’s a signal that “Hey, you might like this company, but I think, at least in the short term, it’s going to have some rough times ahead.”

            I think this is a valuable signal to send to the market as a whole. Sure, it can be abused, but then, that’s true of anything and everything

          2. Wall Street vs Main Street is really about corrupt politicians and the FRB putting in policies that allow Wall Street to privatize gains and socialize losses.

            You’re still new around these parts so you probably aren’t aware that the modifier “corrupt” is unnecessary when referring to politicians — it is considered inherent in the noun (along with slimy, dishonest and two-faced.) A modifier for politicians is only required when referencing an exception, e.g., “honest” politician.

            Even politicians we like are suspected of being less committed to Liberty and more in need of commitment to any of several various institutions.

    1. Everything I know about futures trading, I learned from Pratchett — and “Trading Places.”

    2. I don’t know what Terry Pratchett had to say about futures and options, but when I first heard about them, and how bad they are for investing, I wondered “why the heck do these things even exist?”

      I then learned that options are there for employees to have a stake in the business without having added risk: “join my startup, and you can have the option of buying stock in us if things go well!” and that made sense for me.

      Then I learned that futures are the result of a farmer saying “I’m going to grow some corn, but I don’t know if the crop will succeed, and if it does, I’m afraid that I’ll have to sell it for pennies on the dollar it took to grow!” and the cereal manufacturer saying “Hey, farmer, I’m deathly afraid that when I need corn for making cereal in three months, your crop is going to be insanely expensive!” and so the two agree to trade off windfalls — extremely expensive corn for the farmer, extremely cheap corn for the manufacturer — for the certainty of a predictable price. Not only does this make sense to me, it’s a “Wow, that’s a great idea” level of making sense!

      I’m still not convinced it makes sense to actually trade in options and futures, but this merely seems to be the result of “if you can dream it up and create it, you can trade it, if you really want to”, and apparently a lot of people really want to trade things like this….

      I’m not going to argue against it, either — I want to live in a free country, and I’m sure that trading in futures and options have *some* good effects, somewhere — but for anyone who trades in these things, I can’t help but shrug my shoulders and say, “Hey, you be you!” and leave it at that.

      1. if you can dream it up and create it, you can trade it

        So, sort of like Rule 34 for economics?

        1. Yes, that sounds about right.

          Unfortunately, Economic Rule 34 applies to politics as much as anything else….

          1. We need to bring that out of the shadows. Establish an exchange where everybody can buy and sell politicians on the open market. There could be ‘common’ stocks, which convey total ownership, and ‘limited’ stocks, which control the politician’s vote on a single bill, or certain defined issues.

            Of course, there would be options, proxies, futures and derivatives, and some way to hedge your investment in case the politician gets recalled, convicted or assassinated, or just dies of natural causes.
            “We’ve got the best government money can buy!”

            1. They sell over the counter now. OTC transactions are not regulated. dirty politicians are cheap because there a lot of supply

            2. Unfortunately only honest politicians stay bought. And honest politicians are considerably rarer than unicorns. This makes futures in politicians rather volatile. And anyways what happens if you can’t roll the contract over and you have to take delivery of one of the SOBs (Or DOB’s not meaning to be sexist).

              1. Q: What’s the difference between a politician, and honest politician, and a statesman?
                A: Any politician can be bought.
                An honest politician stays bought.
                And a statesman is a dead honest politician!

                1. Reminds me of an old one:
                  Q: Whats the difference between a Car Salesman and a DEC computer salesman?
                  A: A car salesman usually knows when he’s lying

      2. I love options. I use them all the time, usually to hedge but sometimes, when the odds are right, to speculate. You’d better know what you’re doing though. When they say that the downside in naked option writing is infinite, they mean it. You can lose more than everything.

        Options are both the safest and the riskiest financial instruments available. It all depends on what you do with them.

  2. An update.. It’s difficult to find out who did what to whom in the markets. Sometimes you never find out. The word on the street is that the “pros” in question were the Bank of China and the losers were largely Chinese Retail Investors. If true, they shelled their own people to get to us.

    1. I’m not sure how much that should be trusted. NYC is a little stressed now, and traders have to be able to run the same calculations that the rest of us can in terms of ‘Wuhan virus is racist’. If someone is deeply in denial about changing their internal perceptions with regard to domestic politics, they may still abnormally fix on rumors/apparent facts that align that way for part of their mind, but not for the rest of it. There may be enough traders realizing that China is the enemy, but unable to cope with seeing the Democrats/left as enemies, that they are unusually irrational with their rumors.

    2. Update on an Update WTI Oil is up a bit more than 4% today to a bit north of $17 USO, the derivative of a derivative ETF that tracks it is down about 1.3%. Contango can be weird.

    3. Hell China will run their people over with tanks. Financially fragging them seems almost civilized for the CCP.

  3. Thanky kindly, sir, for this informative essay.

    May your gas tank never run dry.

    The temptation to make some remark ridiculing Alexandria “Now is the time to invest in green energy” Occasional-Cortex is great, but what demeaning thing could I say as belittling of her as her own utterances?

    1. I hope there comes a day where I never put a drop of gas in my car again.

      Of course, I also hope to see the day when I could fill my gas tank with ammonia, produced by a simple liquid salt thorium reactor, but that day is further off than I’d like to admit….

      (And the fact that AOC isn’t familiar with this option makes me think that she’s not so much as concerned about the environment, per se, as she is about leveraging it so she and her ilk can have control over us.)

      1. Ok I’ve looked up Ammonia engines and see they exist (at least in test models). But the NH3 is going to give N02 and NOx emissions when combusted. This is an issue with almost any internal (or external) combustion engine because of the nitrogen in the atmosphere. Why not simply go to H2 based fuel cells? They were expensive a while back but the zeolites used to catalyze the reaction have gotten way better and there have been some clever non pressurized storage techniques (hydrides) that get around trying to store pressurized or cryogenic liquid hydrogen in a vehicle. Basically a Hydrogen car is an electric car with a better storage system, you can use regenerative braking and such like to extend its range, we already have some pretty good tech on that front with all the silly surge for hybrid/electric vehicles. Admittedly ammonia is easy to make although the Haber process takes methane to extract the hydrogen. So why bother clipping 3 hydrogens on a nitrogen other than ammonia is a smidge easier to store than gaseous hydrogen? Good old electrolysis like we all probably saw in high school chemistry is a massively inefficient way to generate hydrogen although with cheap enough power, maybe we could go there. I think the generation of H2 from methane does throw out CO2 so neither Hydrogen or Ammonia is CO2 free unless you get electrolysis or some other process (catalytic?) going.

        1. What we need is an electric car DESIGNED AS an electric car, not a gas-engine car with an electric motor stuck into it. Four motors, one at each wheel, where the power is needed. Sodium batteries, which would rapidly become much less expensive than lithium batteries. A 30 KVA gas-turbine-alternator APU that can run on gasoline, diesel fuel, kerosene, fuel oil, vegetable oil, or alcohol. With a different fuel tank and injectors, it could run on propane, methane or hydrogen.

          Gas turbine engines are much more efficient than piston engines, so such a car could get 60 to 80 MPG equivalent. They are also inherently cleaner-burning. With a moderate-sized gas tank such a car could go more than 1,000 miles on one filling.

        2. Hydrogen is hard to transport and store, and it has crap volumetric fuel density unless you start looking at stupid high pressures or stupid low temperatures. All of those problems can be solved by binding the hydrogen to another element, such as carbon.

          I think that as the oil finally runs out, many decades from now, people will start setting up power stations to create hydrocarbons out of water and CO2. The chemistry is fairly well understood and the products can slot seamlessly into the existing distribution network.

        3. Ammonia was sometimes used as a farm fuel in the 1930s. Wisconsin and others made engines set up for it.

          It pretty much sucked as a fuel, but during the Depression, you used what you could get.

      2. And the fact that AOC isn’t familiar with this option …

        If we’re going to engage in a discussion of things with which AOC is not familiar we’re going to need a MUCH bigger blog.

        1. In some ways, though, “AOC is not familiar with…” is shorthand for “The entire Green Movement is not familiar with…”

          I don’t think this kind of thing is on the Green Movement’s radar, and to the degree it is, they oppose it tooth and nail.

  4. See ‘The Last Centurion’ for a detailed debunking of ‘organic farming’.
    I can’t help it. ‘Contango gone wild’ sounds like a REALLY strange YouTube video.

  5. They are derivatives of a derivative in fact. Nothing wrong with this per se


    Now, these thoughts are coming out of a very different type of derivative, Collateralized Mortgage Obligations (CMOs), and some of the craziness we saw after the 2008 mortgage crisis, so that may create a lot of the issues.

    Caveat aside, there has been talk around my office, or was a decade ago, about the ideas that derivatives create a friction that rubs off the market signal. The further from the underlying instrument, the higher this friction is. The more the market signal of the actual item is rubbed off, the more volatile and subject to whiplash the derivative is.

    To get an idea of how crazy this got, CMOs could contain Mortgage Backed Securities (MBS), thinking a mortgage ETF or mutual fund, individual mortgages, and other CMOs. Then, you could buy a tranche of a CMO. You could buy a slice that only has mortgages of a given interest rate, credit score, maturity, and so on.

    You could also buy the “Xth to Yth mortgages to pay off” where pay off is a broad term indicating “ceases to make regular interest payments” due to early payoff for whatever reason or default.

    So, here’s 1000 mortgages. Which are the 11-20th to pay off? Not which are the 11-20th maturity dates, but to pay off. Fact is no one knows. So, you’ve bought something somewhat random, from your POV, and you analysis. Well, there isn’t a good analysis.

    CMOs have made me wary of derivatives of derivatives of derivatives and so on, the chains can get too long. It’s one of the few times I’ve honestly considered that regulation might be required. Of the three others, another is in the mortgage market and is, IMHO, the real reason for the collapse, although it isn’t a desire for regulation per se, but of uniformity.

    1. I semi-retired, prematurely and not of my own volition, when in 2006 I pointed out that there was “a problem with the underlying” with CMO’s. When you have derivatives of derivatives with leverage priced by a model that explicitly excludes the kind of result we had, well you get 2008.

      I remember some clown telling me that 120% LTV no doc liar loans were lower risk than standard conforming models because data. I got fired, he got promoted. Actually reminds me of the current F’Up. Everyone has become an expert and none of them know anything.

      Don’t get me started on re-hypothecation.

      1. The only CMOs we held were obtained in an acquisition. That the company made against our advice.

        I came to the group after and still consider myself much more a programmer than quant, with mathematician somewhere between the two. What I can say, is we put a lot of thought into “what do the models not model” both that we know they don’t and that we don’t know we should be.

      2. In my Master’s Seminar (for my MS in Mathematics), one of my fellow students presented on the model used to make *lots* of money off of options; the model was fantastic, until one little change made the entire thing come crashing down, which, in turn, resulted in a huge bailout from the Federal Government.

        I have often reflected on how one might carefully examine the assumptions of a model, and then put in triggers that would warn the model users that something may have changed that makes the model invalid — and thus, now would be a good time to scale back on things. This may or may not work, depending on how fast the assumptions could change.

        But either way, it’s also good to know that if I ever end up in the financial sector, not only might my suggestion be ignored — if I discover something like this, I might even be fired!

        (Sigh, life can be funny that way….)

        1. Never be right when everyone else is wrong. My father told me that when I was first starting out. What was really galling was they all cashed out and then went to DC saying that nobody could ever have foreseen this thousand year flood. Bollocks.

          Can say no more, NDA.

          1. As the old saying goes “In the land of the blind the one eyed man is in for a rough ride”. Nobody ever likes to hear “I Told You So”.

            1. Nobody ever likes to hear “I Told You So”.

              Not Fair! I’m so good at “I Told You So.” I never get to say it! (Because Live ain’t Fair.)

    2. They d sound a bit like Chinese sausages — you’ve no way of knowing what went into the grinder, all you’ve got is what came out.

      There was a reason this Hebrew National ad resonated so much.

  6. I’d have no issue with CMOs by themselves. My issue with them at the time was the use of the Gaussian Copula to estimate the default rates. That was total BS. There’s a great article, on Wired I think though it’s spread around a lot, Called the Formula that Killed Wall Street. Worth a read. Bad Math and Moral Hazard wrecks the world. Hmm. Where else do we have bad math and moral hazard.

    1. I’m not going to point to any specific examples (ahem …cough… pandemic models over the years …cough….) but it’s kindof funny when time and time again, certain models suggest we’re going to suffer hundreds of thousands of deaths even if we take action, and millions if we don’t … yet, time and time again, actual deaths are significantly smaller than what was projected, whether or not said action was taken.

      It’s also funny when said actions only model one aspect of society — say, the spread of a deadly disease — yet no one tries to model what would happen if we took severe action to limit that disease on, say, the economy, and what deaths might happen from something like that. It’s as if these model creation experts only live in one little universe, ignoring the complexities of the world, or something like that….

      1. Funny seems a wrong word to me.

        Decisions of what systems are modeled, and which ones can be modeled separately from lack of coupling, are of critical importance to developing useful models, and of understanding which ones are useful.

        Bunch of Mechanical Engineers had a discussion of how pure Fluid Mechanics might label a bunch of different things as ‘shaft work’, outside of the bounds of formal fluid mechanics analysis. One of the examples was electrical power crossing the system boundaries. One of the MEs asked some questions about the generator that is implicitly on the other end of the power cable. Electrical Engineers have spent a lot of effort on theory of power cables, precisely so that the generator and the motor on different ends of a cable can be engineered independently of each other. Engineering can be understood as a lot of effort spent finding conditions where it is safe to uncouple systems of equations, and handing each system to a specialist to study the reality of.

        ‘What if we look at it in more detail, maybe there is a tiny coupling in practice’ is always an obvious question. Sometimes it is useful, because there are conditions where the limits of ‘approximately uncoupled’ are important. Back to fluid mechanics, I have heard that incompressible flow is a nice example of this.

        Here, we have three areas of modeling. Epidemic spread, rules implementation/enforcement, and economic damage. Not being a quant or an epidemiologist, I have no real opinions on how simplified an viral or financial model can be and still be useful. I know that we could never solve a model of either that was complex enough to fully capture reality, and would never have the training/initial/boundary data if we could. At most, we could couple two systems of very complex equations together. Best would be simpler, but the minimum necessary complexity level may well be beyond the state of the art.

        The Joker in the deck is the rules implementation/enforcement, which is inherently a hairier problem. Any situation with a few rule makers or modelers covering a bunch of people who may be a little hostile will fail to capture something that the bunch of people will notice. Virology is easier because virii do not have minds. Finance is easier, because you can make some predictions about mutual interest.

        Modeling is big these days. We have maybe scores of modeling specialties. Some are very useful, and some are not very useful. Maybe a specialist knows. We are all basically layman, and the real problem is how a layman is to cope with all the specialists’ claims of professional privilege.

        Statistics kind of came together and took off, last century.

        Lawyers have long been something of a profession. Engineers really came into their own strength during the 19th century. Doctors have some older and younger parts of their profession. I couldn’t tell you about Accountants. What privileges do they claim, why do we let them get away with the claim, and where do we draw our lines in the sand?

        I say that there are a bunch of scribblers out of academia, and we need to be reminding all of the professions that the tolerance of the layman has limits.

        1. My sister is a Civil Engineer. One of her professors favorite lines was “bridge fall down, no partial credit.” One of the primary reasons this goes on is the perps have little skin in the game since they’re isolated from the downside.

          I’ve been trading on my own account for a long time, concentrates the mind that does since I’m playing with my own money and not the customer’s.

          This Ferguson clown at ICL had 100mm dying of bird flu and similar from mad-cow. For years, one could not buy “beef on the bone” in Britain and you had to have a channel to a traditional butcher to get stock bones. All from a bad prediction, stupidly bad in fact. at the same time, you could buy beef stock made in a Britain from British cow bones. Somehow those bones wouldn’t give you mad-cow. As of 2018, 231 cases have been reported worldwide. by that measure, Professor Ferguson has improved a great deal. He’s still employed though, has his own lab paid for by a Saudi oligarch.

          1. “bridge fall down, no partial credit.”

            The engineering firm that misdesigned the FIU clusterfail keeps trying to wriggle out of that truism, though pushback from the TX_DOT caused them to get fired from one bridge project and forced to redo the calculations on another. (And all this is before the tort lawyers get going on the FIU bridge deaths.)

            Sad that Herr Doktor Ferguson and company have not suffered a corresponding fate. OTOH, there might be some shrewd lawyers spoiling for a piece of that sacred cow.

            Metaphors mixed while you wait.

            1. Ferguson is at a university and thus immune to any criticism or consequence. Health Commissioner Howard Zucker in NY, who may well be the reason that the death rate is so high, may face some, especially since Cuomo May need cover. If what seems to be true actually is he should probably hang, but we don’t do that In NY so he’ll probably get promoted.

          2. Hmm.

            What we have here is two separate categories that are mixed, and people profiting from treating them as essentially the same. We have studies done to play around with how stuff might really work, that has a serious chance of being wrong, that is really meant to increment us towards figuring stuff out generations of papers or scientists down the line. We have studies funded by the government, that we are expected to presume are correct, and that are considered legitimate grounds for government policy.

            It’s basically a clown nose on/clown nose off thing. Clown nose off: a professor said it, must be true. Clown nose on: if they had to stick to strictly verifiable truth they would be too conservative in asking the questions necessary for the advancement of knowledge.

            Laymen have venues to seek remedy.

            It is possible to force government to change the terms on which grants are given. It would then be possible to force the universities to adjust how they do business if they want that sweet, sweet federal grant money.

            New terms. Government can give two categories of grant. a) Grants that they will not be allowed to present as fact for the purpose of justifying policy. b) Grants that require the academic to i) make falsifiable predictions ii) accept liability if those predictions prove to be incorrect iii) be scorable for incorrectness in a points based way, tied directly to how government is permitted to use them to justify policy.

            When an academic accepts a type b grant, they also accept the risk in points bid. Depending on how wrong they get the study, they can be sued, and depending on how many points of bad predictions they have racked up, they can be fired, forbidden from receiving grants, or blacklisted from academia. Tenure doesn’t count, because the universities would be forced to adjust their terms of employment. And to accept a type b grant, you would have to accept the change in status.

            Okay, this has a lot of issues. There are probably more robust choices of detail, and better ways to arrange things.

            1. If I had a dollar for every time someone confused models and science, I’d have enough money to hire hitmen to assassinate all the people who confuse models and science. Models aren’t the end-all and be-all of science, they’re a way to point scientists in the right direction.

      2. If only it were so that model makers were held to the same liability standards as doctors, pharmaceutical companies, automakers and other ordinary businesses.

  7. I once took a class in negotiation from a gent who’d made his money in futures. He mentioned that it’s a very, very detail-heavy, high-stress way to make money. And when you forget one tiny detail, it comes back to haunt you. In his case, potatoes.

    He’d gone on vacation, and thought he had everything under control… but he’d forgotten one single future. In potatoes. And since a future is is essence a promise to buy when the date comes up, guess what happens when the date came up? A semi-truckload of potatoes, delivered to… his front lawn, since he’d given no other directions, having forgotten he held that contract.

      1. Pork Bellies would be bad. Frozen Orange juice concentrate also not good. Although Barrels of WTI crude would be no fun either 🙂 .

    1. Pigs on the hoof would disperse rapidly throughout the area and make one quite unpopular with the neighbors. Unless it’s a very redneck neighborhood.

    2. Dammit, I’m still trying to imagine a neighborhood where setting a few dozen pigs loose would make you popular.

  8. BGE,

    Since we have you here and you seem to know something about oil,

    Suppose that tomorrow we suddenly have cheap cars that run on happy thoughts.

    How much of what is refined into gasoline can be repurposed into something else we need, such as plastics?

    Anyone who knows, feel free to chime in.

    1. I’m not an oil guy, so I don’t know. My knowledge of Chemistry ends with what I learned sophomore year of prep school. Sorry.

      1. Basically, crude oil is one of the most efficiently used resources around. Even if it were not used for cars or heating, we would still have to refine it just as much if you want, tires for you car, oil to lubricate it and everything else, plastic, and a multitude of other products or product ingredients far too long to list here. Simply put, without the byproducts of crude oil refining, the entire modern economy and society will come to halt.

        This of course is exactly what the left wants.

        1. I had the general sense of this, but what I am asking, specifically, is how much flex is there in the process? If demand for gasoline drops and demand for plastic rises, can the refining process be altered to reflect that, or are the fractions that get used for this and that pretty much locked in?

          This is one of the questions I’ve been asking for years that seem to bumfoozzle people. Like the “Ok, let’s say we put up enough solar panels to run the country, and have somehow solved the intermittence problem; what does removing that much energy from where it was going in the first place do the the environment?” question I’ve brought up here a time or three. I don’t get evasions, like I do when I ask committed battery car fans “where is the electricity supposed to some from?”; people just don’t seem to be able to parse the question at all.

          And it strikes me as an important issue. As Carshark points out, even if we don’t use gasoline anymore, we are still going to need lubricants and plastics. And if shifting away from gasoline powered cars makes an irreducible fraction of petroleum a highly flammable waste product, that’s a factor that needs to be considered when computing the damage done to the environment by electric (or hydrogen) powered cars.

          Not that the Green Fascists WANT to compute that.

          1. what does removing that much energy from where it was going in the first place do the the environment?

            Solar panels don’t remove energy. They block sunlight from reaching the ground under them, convert most of it into heat on the spot, and 20% to 25% of it into electricity, which is sent somewhere else and used to power stuff, and eventually also dissipates as heat. Which is what would have happened if the sunlight had just hit the ground. The shadow inhibits plant growth, which is why putting the panels on roofs and parking lots is a good idea.

            shifting away from gasoline powered cars makes an irreducible fraction of petroleum a highly flammable waste product

            That fraction is used in solvents, paint and other products. Current refining processes use catalytic cracking to increase gasoline production by breaking longer molecules up into short chains of 6, 7 and 8 carbon atoms. If gasoline demand diminishes, they’ll stop cracking and make less gasoline.

            1. The opposite of cracking also exists. They can take short hydrocarbon chains, add energy, and get longer chains out. The ultimate answer to the original question is that the refineries can produce pretty much any mix of hydrocarbons the market needs, but if we’re not using gas and diesel for transportation energy the overall demand for oil is going to fall precipitously.

            2. Thanks for the information about refining; that’s more or less exactly what I was looking for.

              As for solar panels not removing energy; the hell they don’t. If they don’t remove energy, then what the @%$#^ are they FOR? OK, they don’t remove a lot, as a percentage, but IF we managed to erect enough solar panel to power the country they would necessarily be removing a lot as an absolute volume. And that HAS to have an effect. Maybe its a benign effect, but I would be a great deal happier if I was reading about people looking into it.

              I’m interested to note that I am now reading about studies that show that wind turbines affect the environment by A) slowing the wind and B) warming their immediate vicinity (for a variety of reasons).

              The Greens have been touting Wind and Solar as ‘free energy’ since I first started paying attention in the 1970’s. And There Ain’t No Such Thing As A Free lunch. I noticed early on that as soon as it looked like somebody might actually BUILD a bunch of hydroelectric generators, the Greens dropped Hydro like new recruits getting shut of a live grenade. And as soon as somebody proposed building a test geo-thermal plant in Hawaii (and disturbing ‘Nature’, as if Nature wasn’t disturbing herself quite adequately in volcanic regions) they turned up to protest THAT, even though they had been talking it up for years.

              Which leads me to my Law of Power Generation; ‘Alternative Energy’ is any form of electrical generation that is in no danger of being practical.

              1. GROOOOAAN. Solar panels do not ‘remove’ energy. First Law of thermodynamics: energy can neither be created nor destroyed.

                When sunlight shines on an inert surface, some is reflected and the rest is converted into heat. When sunlight shines on a solar panel, some is reflected, some is converted into heat, and some is converted into electricity. When that electricity is used, it is also converted into heat — the SAME quantity of heat that would have resulted had it not been temporarily converted into electricity. It might have been moved a few dozen to a few hundred miles along wires in the meantime.

                Solar panels do not remove energy from the environment, they only move it around. Solar electricity takes the place of electricity generated by other means which dump waste heat into the environment along with the electrical heat.

                Generating one kilowatt-hour of electricity produces anything from two to eight additional kilowatt-hours of waste heat, depending on what is used to turn the generator. Steam boiler/turbine systems are around 30% efficient, whether they are heated by a fire or by nuclear fission. Internal combustion piston engines are around 15% efficient.

                Solar power INDIRECTLY reduces the amount of heat we put into the environment, as well as reducing the amount of pollution and combustion products — water vapor and carbon dioxide are NOT pollution.

                As for the antics of ‘environmental activists’ — I don’t try to explain, or understand, what goes on inside their heads. From the outside, it seems to bear very little resemblance to logic or rational thought.
                He’s a lumberjack, and he’s OK.

                  1. Exactly. Do solar panels destroy energy? No. Do they move it from where it would have acted on the local environment to somewhere else? Yes. That MUST have an effect. Maybe it’s an effect we can live with, but I would be a great deal happier if the question was being studied.

                    One of the things about the Left that makes me angriest is the way it has perverted environmental issues. Even when it hasn’t used environmentalism to forward it’s political agenda, it has prevented intelligent assessments by bringing into the discussion vast numbers of nitwits who simply WILL NOT do the friggin’ MATH. NO, WE CAN’t replace fossil fuels with solar and wind power, because there simply isn’t enough LAND to put the solar and wind plants on. Even if we could, there’s no way to store enough energy to run the grid, absent a major breakthrough. You can’t replace all internal combustion engines if battery cars won’t do the kind of work some people need, and won’t work in cold climates.


                    1. I like to tell people who believe that electric cars are the future to calculate the power of an average gas pump. How many joules of chemical energy does it deliver each second? It’s about 15 megawatts. For comparison, a Tesla Supercharger runs at 250 kilowatts. Even if the electric battery and motor system is significantly more efficient than an internal combustion engine, we’re still an order of magnitude or so away from electric vehicles being the future.

                    2. Moving energy around with solar panels has a lot less effect on the environment than generating electricity with fire or fission. I have solar panels on my roof; of course, all of that electricity is used within a hundred yards of my house. I doubt any of it gets sent back through the pole transformer, it just reduces the load.

                      The ‘environmental activists’ seem to want everybody to stop using energy, producing pollution, or affecting the environment in any ‘unnatural’ way. Squatting in a cave, gnawing on raw vegetables might be OK, but NO FIRE!

                    3. “The ‘environmental activists’ seem to want everybody to stop using energy, producing pollution, or affecting the environment in any ‘unnatural’ way. Squatting in a cave, gnawing on raw vegetables might be OK, but NO FIRE!”

                      And they are totally welcome to live that way, on land that they own themselves. It’s when they start trying to insist that I live that way that I start thinking pensively of tire irons and baseball bats.

                    4. they are totally welcome to live that way, on land that they own themselves. It’s when they start trying to insist that I live that way that I start thinking pensively of tire irons and baseball bats.

                      You fascist, far-right, h8er! Don’t you see that if you’re not part of the solution you are part of the problem? If you are part of this problem you are DESTROYING THE EARTH and all who live on it!!! Your threat to their existence justifies elimination of you and your ilk.

                    5. “ You fascist, far-right, h8er! Don’t you see that if you’re not part of the solution you are part of the problem? If you are part of this problem you are DESTROYING THE EARTH and all who live on it!!! Your threat to their existence justifies elimination of you and your ilk.”

                      And underneath all that ranting is the deepening realization that They – The Anointed – are losing. That we – The Unwashed – are rebelling against their arrogance and idiocy. Oh, they still have followers, but their lock on the terms of debate slipped away from them. Their accumulation of power peaked with Nixon’s resignation. Every victory since has cost them more than they gained. Until quite recently they were able to fool themselves into thinking it was still going their way. But they didn’t have a charismatic leader to follow up on Obama, and a shrill scold just didn’t cut it. Trump. Brexit. Boris Johnson. There have been other nasty shocks, too.

                      No, we aren’t part of THEIR ‘solution’. And we aren’t going to be.

                    6. BTW, again with the understanding that the yellow jackets aren’t US but they’re kind of the equivalent for the culture (Which is very different.)
                      They’re at it again. France is burning.

              2. The goal of the environmental movement isn’t to save the environment, it’s to end the modern industrial society so we can go back to feudalism. With the heads of the various movements assuming the role of the nobility, of course.

          2. It’s a question that probably needs a more than one type of expertise, and some of them quite specialized.

            Probably not a whole lot of chemical engineers/chemists with deep refinery experience who are also greens.

            The right kind of oil company might’ve brought the experts together to figure it out, and have the answer on tap.

            Some parts really are burned off during processing, because hard to deal with, or uneconomic to turn into something else. But burning to EPA spec isn’t necessarily a cheap process. Burning stuff off can provide energy to dump into other processes.

            My understanding is that the refineries are doing at least two tasks. One is the distillation stuff, where you separate your crude into fractions at different weights. Another is spending various resources to change the weights to ones you have more economic use for.

            So it probably isn’t an irreducible fraction.

  9. I would add one more bit of Wall Street wisdom: Pigs gat fat. Hogs get slaughtered.

  10. You might also see something called Brent Crude, which is the same sort of thing for North Sea oil.

    I thought Brent Crude was a star in a Fifties noir television show, sort of a poor man’s Mike Hammer.

      1. And here are the lyrics:

        Black and viscous – bound to cure blue lethargy
        Sugar-plum petroleum for energy
        Tightrope-balanced payments need a small reprieve
        Oh, please believe we want to be
        in North Sea Oil, in North Sea Oil

        New-found wealth sits on the shelf of yesterday
        Hot-air balloon – inflation soon will make you pay
        Riggers rig and diggers dig their shallow grave
        But we’ll be saved and what we crave
        is North Sea, is North Sea Oil


        Prices boom in Aberdeen and London Town
        Ten more years to lay in fears, erase the frown
        Before we are all nuclear – the better way!
        Oh, let us pray: we want to stay
        in North Sea, in North Sea, in North Sea Oil

  11. I’m just up the road from Cushing, OK. I knew they had lots and of storage tanks but I didn’t realize how strategic they are. Very interesting to see Cushing mentioned outside of the context of drug busts or local sports.

    1. Other odd things in the news – Malignancy must be awfully upset. Imagine! Not allowing absentee ballots to be cast a week after the election!

      Pelosi calls Supreme Court justices ‘party hacks’ for decision on absentee voting in Wisconsin primary
      House Speaker Nancy Pelosi called the justices on the Supreme Court “party hacks” over its ruling in regard to Wisconsin’s election earlier this month.

      Wisconsin held its primary on April 7, despite several lawsuits to have voting delayed because of the coronavirus pandemic. The decision made its way up to the Wisconsin Supreme Court, which ruled in a 4-2 decision the day before the election that it would go on. The same day, the U.S. Supreme Court ruled that the state could not extend absentee voting in a split 5-4 vote.

      “What happened in Wisconsin was unconscionable on the part of the United States Supreme Court,” Pelosi said Sunday. “They turned themselves into party hacks. Party hacks. The court had said the election had to take place on that day, the court — the lower court — also said, though, there should be a consideration for more time, etc., for getting and counting absentee ballots. The Supreme Court even reversed that.”

      She continued, “They stuck with … that you have to do the election that day, but no accommodation. And why? Because they had a political purpose. Disgraceful.”


      Pelosi has been working to require a vote-by-mail election in the upcoming coronavirus relief package. Some Republicans oppose mail-in elections because of concerns about election legitimacy.

      1. They’re ‘party hacks’ for upholding the law? It’s official; Malig-Nancy is now totally unhinged.

  12. The party is always right. The will if the party is law.

    Here at home, where the party rules unopposed, the states of NY, NJ, and away in Cali, ordered nursing homes to admit WuFlu patients. There were several homes that had no wuflu patients who had them after. Thousands died. At least half the dead in NY and NJ were in nursing homes. The party has blood on its hands. in a civilized world, they would hang. In a world ruled by the party, they’ll be protected, re-elected, and promoted,

    I’ve been trying to figure out why NYC got hit so hard. Density, public transport, mix of people have all been floated, but we have to ask were they enough to have the death rate in NYC be roughly 8 times Florida, who has a significantly large number of older people. The answer might well be Killer Cuomo, murderous Murphy, and their merry men Zucker, the WHO man and crew.

    This might get some traction or it might not. Cuomo is blaming the nursing homes, and some of them were dire, but not all. Some of them seem to have been examples of self sacrifice and the records about the city response are troubling.

    in other news, Colorado is reporting fake news of a 21% increase in deaths, which would mean 120. There were 2.

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