Peter L. Berger's Blog, page 567

Are Shale Producers Out of Tricks?

America’s oil benchmark—the West Texas Intermediate—is now trading just above $45 per barrel, and those heady days of $90 or even $100+ crude are a distant memory. But while fracking companies have thus far managed to keep the oil coming, they may be reaching the limits of their ability to survive at bargain prices. Reuters reports:

[R]ecent government and private data show output per rig is now flatlining as the industry reaches the limits of what existing tools, technology and strategies can accomplish.

“We believe that the majority of the uplift from high-grading is beginning to wane,” said Ted Harper, fund manager and senior research analyst at Frost Investment Advisors in Houston. “As a result, we expect North American production volumes to post accelerating declines through year-end.”Drillinginfo, a consultancy with proprietary data, told Reuters well productivity has fallen or stabilized in the top three U.S. shale fields – the Permian Basin and Eagle Ford of Texas and the Bakken of North Dakota – since July or August.

So not only is output tailing off—something we’ve known since this summer, when production started to drop from a high water mark in April—but, more importantly, drilling productivity is plateauing. For months now, shale producers have defied expectations with their ability to keep the crude flowing, even as prices have fallen more than 50 percent since a high of $117 per barrel in June of 2014. The industry resilience comes down to innovation, as companies have employed a variety of new methods to stay afloat in this bearish market, including employing “walking” rigs, leveraging big data, upgrading systems, drilling more wells per pad, “supersizing” drilling processes, focusing on the most productive plays, “refracking” wells previously thought to be spent, fracking with sewage water, and taking advantage of falling costs in the oil services industry.

But now, it seems that analysts believe producers have reached the end of their creativity. Yet just last October, the thinking went that the majority of U.S. shale companies needed an oil price above $70 per barrel to stay profitable—and here we are a full $20 below that level and production hasn’t fallen off a cliff.There remains a danger in every sort of forecasting of predicting the future based on the conditions of the present. On the one hand this is just common sense—we can’t make up outlandish numbers based on a hypothetical technological breakthrough or devastating global crisis—but on the other it should caution us not to place too much faith in the prognosticators. No one predicted the shale boom, just as no one expected it to prove so resilient to price pressures.There’s no denying that these are trying times for American frackers, just as they are for the petrostates with whom those companies are competing for market share. Productivity appears to be stabilizing, but there’s no telling what new technique might be pioneered next. As always, bet against American innovation at your own risk.

Let’s Try the Stick: ACA Penalty to Double

The ACA penalty for Americans that remain uninsured will more than double in 2016, and supporters hope the increase will lift enrollment rates. WaPo:

That means the 2016 sign-up season starting Nov. 1 could see penalties become a bigger focus for millions of people who have remained eligible for coverage, but uninsured. They’re said to be squeezed for money, and skeptical about spending what they have on health insurance. […]

But in 2016, the penalty for being uninsured will rise to the greater of either $695 or 2.5 percent of taxable income. That’s for someone without coverage for a full 12 months. This year the comparable numbers are $325 or 2 percent of income.

The math is pretty clear. A consumer would be able to get six months or more of coverage for $695, instead of owing that amount to the IRS as a tax penalty. (That example is based on subsidized customers now putting in an average of about $100 a month of their own money.)

Increasing the non-compliance fine was always part of the plan: A higher penalty provides a greater “stick” for those inclined to choose the penalty over the cost of insurance. But even though an increase was planned from the start, recent circumstances make a higher penalty vastly more important for the law’s sustainability. As Brian Blaise details in Forbes, coverage rates have fallen short of the levels that the law’s supporters predicted (h/t Reihan Salam):

On October 15, the Obama administration significantly downgraded its estimate of how many people will enroll in exchange plans next year. The administration now expects only 10 million exchange enrollees at the end of 2016. Charles Gaba, a statistical expert who closely tracks Affordable Care Act (ACA) enrollment and who made fairly accurate projections for 2014 and 2015, is somewhat more optimistic. He projects enrollment at 12.2 million people by the end of next year.

These low estimates should rock the health policy community. The Congressional Budget Office only four months ago projected there would be 20 million exchange enrollees next year. This CBO estimate was 3 million people fewer than its estimate issued just after the 2012 Supreme Court case that preserved the law and 1 million fewer than its March 2010 estimate, produced days before the law was passed by the House of Representatives.

At least a part of this story is that the fine has been too low—in 2014 it was set at only $95—but it’s unclear whether a higher fine will significantly narrow this gap between prediction and reality. For a fine really to be effective, it would need to be close enough to the cost of insurance to motivate people to get coverage—and if it were to become that high, the same households that currently find the insurance unaffordable would find the fine unaffordable, too. Anyway you look at it, the best way to attract people to insurance is to make it cheap enough so that they can afford it, and for many people the ACA has not done that. 

Dealing with Assad

A report by an influential Israeli think tank counseled that Jerusalem should consider changing tack in Syria. “Despite the high level of complexity created by Russia’s involvement in Syria—or perhaps, rather, because of it—Israel must engage in active efforts to topple Assad and hand Iran a strategic defeat in Syria”, a policy brief on the website of the Institute for National Security Studies said. More:

Tehran’s drive for regional hegemony is a threat to Israel. This threat is coupled with Iran’s ongoing efforts to arm itself with nuclear bombs, develop its missile program (only recently, the Iranians reported an experiment with a new long range surface-to-surface guided missile, and revealed the existence of an underground tunnel serving as a base for ballistic missiles with a range of 1,700 km), and generate a military presence on Israel’s border with Syria and Lebanon. Despite this, Israel has so far avoided making a move that could have contributed to the effort to topple Assad and thus undermine Iran and Hizbollah’s presence in Syria.

The new energy Russia is injecting into the crisis creates two opportunities for Israel. One lies in strengthening an alliance with the Sunni nations in the region, first and foremost Saudi Arabia and Turkey, under the leadership of the United States. The anger and frustration experienced by these states given Russia’s unilateral move could therefore tag Israel as a strategic asset that can serve as a partner in a system to dramatically weaken the threat of the radical axis from the north. Two, in case of failure in moving the “Western” coalition into concurrent action against Assad and ISIS, Israel should strive to realize the fourth option – an Assad-free Syria – as an arrangement reached in partnership with Russia.

Thus far, the Netanyahu government has appeared content to ensure that Russia and Israel are properly “deconflicted” when operating simultaneously over Syrian airspace—Russia when bombing Assad’s enemies, and Israel when it hits arms shipments clearly intended for Hizballah. But with Assad visiting Moscow yesterday in a very public display of unity, and with Hizballah providing critical ground troops for the joint Russian-Iranian-Syrian assault on Aleppo, it increasingly looks like Israel may not be able to just wait and see how things play out.

One of the authors of the report, former Israeli military intelligence chief Amos Yadlin, is a serious voice in Israeli foreign policy circles. It’s almost certain his writing is being carefully read and considered.

China Fallout: Mongolian Economy in Crisis

Recent Chinese economic weakness has been hurting emerging markets around the world, and no economy has felt the slowdown more than Mongolia. The troubles in Mongolia are a case study in what has already been happening to China-dependent emerging markets around the world, and a sign of things to come. Bloomberg reports:

Mongolia, sandwiched between China and Russia, is an early illustration of fallout from slower growth in the world’s second-biggest economy. “When China sneezes, we get a cold. That is how the situation is. It really affects us in a major way,” Dale Choi, founder and director of the research firm Independent Mongolian Metal & Mining Research, said in a phone interview.

That’s because about 88 percent of Mongolia’s exports — mostly commodities including coal — wound up in China in 2014 and falling revenue from these products is pushing Mongolia deeper into economic crisis. Earlier this month the country’s Finance Minister Bolor Bayarbaatar unveiled emergency austerity measures so the government can pay its bills.

Mongolia is now in an “emergency” situation, planning an austerity package that will lead to job cuts in the bureaucracy and selling shares of state-owned companies. Probably more than any other country, Mongolia combines extreme exposure to Chinese markets with a near-total reliance on commodities exports. Since the fall of the Soviet Union, Mongolia has transitioned towards a market-based economy and has deepened its ties to resource-hungry China, while moving away from resource-rich Russia. For two decades, that strategy worked. But now, Mongolia’s failure to diversify is making for a hard landing.

The Chinese economy is beginning to transition from heavy industry to services. That is good for China, but it means that commodities-driven economies like Mongolia’s will be left in the dust.

U.S. a Green Leader, Thanks to Fracking

No other developed country is making more progress in moving away from coal than the United States, according to a new report. While Germany is stuck burning more and more of the sooty source, America is setting coal aside in favor of much greener natural gas. Reuters reports:

“The United States has the largest challenge given the scale of its existing coal use, but is making the most positive progress of all the G7 nations,” [a report from the green think tank E3G] said. […]

[C]oal’s share of U.S. electricity generation had fallen to below 40 percent since 2009, it said, helped by a rise in the use of shale gas. Many planned coal-fired plants had been canceled.Jake Schmidt, of the U.S.-based Natural Resources Defense Council, said in a comment on the report that it was unusual for the United States to lead an international environmental ranking, but that big policy shifts were under way. “Just a few years ago we were looking at a vast number of new coal-fired plants,” he said.

The environmental benefits of the fracking boom is something the U.S. and its many shale producers don’t get nearly enough credit for. Through the first six months of this year, natural gas has provided more than 30 percent of America’s energy, far eclipsing coal’s 16 percent. Compare that to 2006, before the shale boom, when coal and natural gas each made up roughly 23 percent of our country’s energy mix.

Fracking has been the obvious catalyst behind this shift, as it has unleashed a wash of new natural gas supplies on the American market. That glut has depressed U.S. natural gas prices, making gas-fired power plants a more economical alternative to their much dirtier coal-fired cousins.But that’s only part of the reason why shale gas is an eco-boon. Natural gas-fired power plants can come on and offline relatively quickly, and are generally less expensive than coal plants. As a result, gas plants are uniquely suited to pair with renewables like wind and solar, which can only produce energy intermittently and so must rely on a baseload source to meet demand consistently when the wind isn’t blowing and the sun isn’t shining. In that respect, shale gas is our best option.So the U.S. is taking a global green lead, and that’s thanks to a phenomenon that has inspired hand wringing and doomsaying by the modern environmental movement. Fracking is dethroning Old King Coal and shale gas is fracking green.

Putin Fires Up His Domestic War on Terror

While Russian troops defend Bashar al-Assad in Syria, President Vladimir Putin is also promising to root out terrorism at home, Reuters reports:

President Vladimir Putin said on Tuesday Russia had foiled 20 militant attacks this year and was stepping up efforts to root out domestic terrorism, almost three weeks after launching air strikes against Islamist fighters in Syria.

The Russian authorities have arrested a number of suspected militants since the Syria campaign started on Sept. 30, a development that stoked fears that militants could seek revenge by attacking targets inside Russia.

Emphasizing the War on Terror at home is a critical piece of Putin’s strategy to portray himself as a strong leader protecting his people from a dangerous world. Putin most certainly benefits from instability in Europe most when it stands in stark contrast to a stable motherland. Radical Islamism in the Caucasus spilling over into the streets of Moscow, a real concern, would just undermine his popular as a competent leader who gets things done.

But given Putin’s authoritarian tendencies, and the Kremlin’s penchant for seeing CIA plots behind many expressions of political dissent, it won’t be surprising at all if the war on terror ends up extending its scope beyond just Islamist groups. The legal framework for the harassment of political opponents and undesirables has been in place since at least 2012. Up until now, these laws have had a chilling effect when just used sparingly in a peacetime context. Under the threat of terror, whatever stops are in place could well come off, giving Putin and his gang an even freer hand to properly clamp down at home.

Another Green Policy Backfires

Everything has a cost. That’s what many California homeowners are finding out, as they struggle to sell homes recently outfitted with better insulation, more energy efficient windows, and solar panels. Reuters explains:

More than 50,000 California households have signed up for Property Assessed Clean Energy (PACE) financing since state legislators passed a law in 2008 allowing residents to borrow money for such things as solar panels and energy-efficient windows. The financing method, authorized by cities and counties, and funded  by venture capital-backed startups like Renovate America Inc, Renew Financial LLC and Ygrene Energy Fund Inc, is then paid off through special assessments on property tax bills. […]

[S]ome homeowners trying to sell their houses have found potential buyers scared off by the higher tax assessments. And now realtors in the state are organizing against PACE, saying it makes getting new mortgages much tougher and can leave sellers stuck in their homes.

In other words, to pay for all of those green home improvements, homeowners are saddling themselves with higher property evaluations—and the higher taxes that go with them—which are in turn making it difficult to sell these houses. That’s left a sour taste in the mouths of many who hoped to take advantage of the federal program—as one homeowner enrolled in the green financing program put it, “I wouldn’t ever do it again.”

These sorts of policies are always pushed through with (we hope) the best of intentions, but they inevitably spawn a number of unforeseen issues. In this case, we’re seeing resale issues, but government-backed green programs also lend themselves to crony capitalism or third-party profiteering.The lesson here isn’t that making homes more energy efficient or powering more homes with renewables are fool’s errands, but rather that the nice-sounding and often politically expedient programs meant to get us to that green utopia have a nasty tendency of backfiring.

No-Fly Zone No Answer for Syria

With former Secretary of State Hillary Clinton’s call the for the establishment of no-fly and safety zones in Syria to protect the local population, front-runner candidates from both parties have now expressed support for a U.S.-enforced no-fly zone in Syria. Regional partners like Turkey are also calling for a no-fly zone. But creating no-fly and safety zones in Syria is not only unrealistic; it’s also dangerous to the population they are intended to protect.

What no-fly zone proponents, which include Senator John McCain, have in mind is for the anti-Assad coalition to designate a part of northern Syria adjacent to the Turkish border as a safe or buffer zone that can be resupplied from Turkey and protected by coalition aircraft. Refugees would then be encouraged to gather in this designated zone without fear of Syrian (and perhaps Russian) barrel bombs, which have claimed so many innocent lives.In theory this sounds like a great idea. Our experience of actually enforcing two recent no-fly zones in Iraq and Libya, however, suggests that in practice no-fly and safety zones in Syria would only invite more violence and chaos.The only previous experience of a safe and effective no-fly zone was in northern Iraq after the conclusion of the First Gulf War. At that time Iraqi strongman Saddam Hussein unleashed a murderous rampage to subdue rebelling Kurds; with more than a million Kurds seeking refuge in the no-man’s land between Iraq, Turkey, and Iran, the international community set up no-fly zones above the 36th parallel to prevent Saddam’s ground forces from attacking the Kurds and to allow the latter to return to their homes. Operation Provide Comfort succeeded in saving tens of thousands of lives and helping the Kurds become one of the few islands of relative stability in the Middle East today.The mission was successful because the objectives and the opponents were clear and singular. There was only one person or power to deter (Saddam), and the mission was a humanitarian endeavor aimed at saving lives. Also critical to the setup was the establishment of a small American-led military ground force in northern Iraq to guard against ground intrusions. The Kurds themselves eventually reconstituted their own military forces to establish law and order at home and stand guard against the Iraqi army.In Syria, a no-fly zone has many potential adversaries in addition to Assad. Even if Assad could be deterred by air power alone, the same deterrence logic does not apply when it comes to the Islamic State or jihadist groups like al-Nusra. Syria today is teeming with militants belonging to such organizations that terrorize the population with beheadings and random acts of cruelty.Air power can stop tanks, but can do very little when it comes to protecting civilian populations from the likes of the Islamic State or al-Nusra. Even Assad’s paramilitaries could easily infiltrate the buffer zone and inflict their share of violence. All it takes is a few bands of marauders on foot to create mayhem and all the air forces of the world would be helpless. Another unintended consequence of a buffer zone bereft of protection from ground forces is that its population would be susceptible to Islamic state’s forcible recruitment of youngsters to their cause.No one, including the no-fly zone’s most vociferous supporter, Turkey—much less the U.S. or the Europeans—is willing to send ground troops into this safe zone. Turkey’s buffer zone is intended to be more than just a humanitarian gesture; it is envisaged as an operational base for the regime’s opponents. This diverges from the Iraqi example where the Iraqi Kurds had no desire to attack Saddam Hussein’s forces.In Iraq back in 1991, there was an international consensus regarding the no-fly zones. The Russians who have directly joined the war on Assad’s side will never approve a United Nations resolution establishing such a buffer. Therefore, a unilaterally declared Syrian buffer zone jam-packed with refugees would become a target of just about everyone.A more recent example of how a no-fly zone might play out in Syria is the one established over Libya in 2011, to prevent Colonel Qaddafi from harming his own population and to encourage his ouster. The no-fly zone did achieve these aims, but in the absence of clear end goals and ground forces to enforce peace, it left a wake of chaos and violence in Libya. The implementation of the no-fly zone left much to be desired, as some of the Western powers had sided with the rebels against the regime and even transferred arms. This was nothing like Iraq, where the Kurds had neither the desire nor the capability to overthrow the regime in Baghdad, in a civil war.The larger problem is that Syria is now divided between government-controlled areas and those ruled by a hodgepodge of jihadist groups, with the U.S.-affiliated Syrian Kurds representing the only exception. The Russian intervention has solidified this stalemated situation; hence one ought not expect change in the near- to medium-term future. Even if the U.S. were to blow the Islamic State’s putative capital of Raqqa to smithereens, there is no organized force capable of occupying this territory and creating a semblance of order. Besides, that still leaves Mosul, an Iraqi city of more than a million, still under the control of IS.The buffer zone, therefore, does not address this fundamental problem. It is a diversion likely to consume resources without achieving any of its aims. With endless supplies of arms and Russian and Iranian involvement on the government side, the idea that this civil war would somehow burn itself out is also turning out to be a fallacy. At some point, neighboring countries will realize that it is only with the introduction of ground troops, with copious support from the U.S. Air Force, that the Islamic State and other jihadists can be defeated. Introduction of ground troops is also an essential ingredient for the Sunni populations living under jihadist terror to rebel against their overlords; their allegiance will have to be earned by these invading forces. Only then and after defeating IS can one meaningfully discuss Assad’s inevitable exit and a transition to a new Syria.

Kansas GOP Hunts for Voter Fraud

The Kansas GOP is taking a new approach to fighting voter fraud, the explosive topic that many in the GOP say is rampant and many Democrats say is a smokescreen designed to give cover to Republican efforts at voter suppression. Instead of pushing for more restrictive voter ID laws, Kansas has given its Secretary of State special powers to prosecute election misconduct. The Associated Press reports:

Kansas is unique among U.S. states in recently granting its top elections official the power to prosecute alleged voting irregularities himself, and Republican Secretary of State Kris Kobach is looking to move a contentious national debate past tough voter identification laws.

Kobach’s office earlier this month filed three election fraud cases in two counties, accusing the defendants of illegally voting in Kansas while casting ballots in the same elections in other states. The law allowing his office to do so — instead of forwarding evidence to prosecutors — took effect in July, and Kobach has promised to pursue more cases in the next two months.

The interesting thing about this initiative is that it might offer—in time—some hard evidence in an area marked by demagoguery on both sides. Democrats swear (unconvincingly, given the number of corrupt big city machines under the Democratic tent) that electoral fraud is a Thing of the Distant Past, while the GOP swears (without enough evidence to convinced the unbiased mind) that it is prevalent enough to be guarded against.

So what we need is answers. In the nature of things, that has to come from officials hunting for it and trying to prove it in court. If they find evidence, that will tell us something, and we can adjust policy accordingly. And if there are a number of efforts that keep coming up with nothing, then we’ve also learned something (and the case for voter identification laws will get much weaker). We should approach this debate with open minds, ready to receive facts—so its important that the Kansas Secretary of State wield his new power even-handedly, and resists pressures to turn this into another partisan scrum.

How the Federal Government Makes College More Expensive

A new report commissioned by Vanderbilt University and conducted by a leading consulting firm offers a first-of-its-kind estimate of just how much money U.S. colleges devote to complying with federal regulations. Inside Higher Education reports:

The nation’s colleges and universities collectively spend an estimated $27 billion each year trying to comply with federal requirements.

Or so says the latest Vanderbilt University report aimed at highlighting the burden of federal regulation on institutions of higher education. […]The study, which was completed by Boston Consulting Group, found that the 13 colleges and universities varied in how much of their budgets were consumed by compliance activities. Compliance with all federal requirements accounted for between 3 and 11 percent of the institutions’ operating expenditures, excluding any expenses associated with running a hospital. […][Vanderbilt CFO Brett] Sweet said that one of the most significant findings was that small and medium-sized colleges are disproportionately impacted by federal regulations, with compliance eating up a much larger share of their expenditures than their wealthier peers.

The study was part of a long-running effort by Vanderbilt President Nicholas Zeppos to push back against what he has described as unnecessary regulations that make college more expensive. “My higher education colleagues and I strongly believe that smart, efficient regulations provide important protections for students, families and taxpayers and hold institutions accountable for the federal dollars they receive. At the same time, we have an imperative to do everything in our power to keep costs down for students and their families”, he said in a university press release. While some higher education experts have been critical of Zeppos’ efforts, University of North Carolina President Thomas Ross was supportive, saying after the report’s release that “many regulations are useful and effective” but “others are unrelated to the mission of higher education.”

The study found that accreditation was among the most onerous regulatory burdens not related to research. The median college surveyed spent 1.3 percent of its non-research budget applying for federally-mandated accreditation—a requirement that is itself anti-competitive, and likely raises college costs by preventing alternative higher education institutions from entering the market. The study also found that research faculty must devote about an eighth of their time to federal regulatory compliance, time that could presumably otherwise be spent on teaching.The steady stream of ominous student debt statistics makes clear that the existing higher education model is overdue for a shakeup. This will require creative, out-of-the-box thinking about how to set up a system that delivers knowledge and skills to young people at fraction of the cost of the existing four-year university. But an important step will be to rein in the regulations coming from the Department of Education. The federal government has helped consolidate a sclerotic system by pumping in billions in financial aid and enforcing rigid accreditation requirements, all while imposing additional, onerous regulatory burdens that raise costs. That needs to change.