Will she save America from the Oil Crisis ?

Was really surprised when i came to know about McCains mate, Sarah Palin(pronounced Pay lin),I first read about her a few years back when i was tracking Crude oil.

I read about this alaskan pipe line (apparently her pet project) and also how prosperous Alaska would become due to high oil prices (Every citizen of Alaska was promised that they will get some 1000-1500$ of Oil Debit Cards).

She was also some kind of Miss USA or Something (Sandra Bullock Miss Congeniality types).

Will her capable administration and ability to handle sensitive Oil Policy on which she is an expert (yes yes when she becomes the president, afterall Mc Cain has had some hundreds of surgeries!!) help America out of the Oil Glut.

Will The NSE "Rentseekers" be future of the Indian Democracy ?

The NSE has successfully launched the currency futures contract.
In about a couple of decades, if What Robin Hanson predicts comes true,it would be this seemingly innocous building which is currently a rent seeker in the Indian derivatives market that would become the seat of all Political Action.
Laws and policys would not only get vetted by servers at Bandra Kurla Complex but also get official thumbs up or down?
And who would give this thumbs up or down ?Politiciants? Officials ? Voters? No SPECULATORS would !!!

Robin Hanson had coined the term Futarchy way back in 2000 however at that time we would have only laughed at that idea! Here is his argument

This short "manifesto" describes a new form of government. In "futarchy," we would vote on values, but bet on beliefs. Elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare.

Democracy seems better than autocracy (i.e., kings and dictators), but it still has problems. There are today vast differences in wealth among nations, and we can not attribute most of these differences to either natural resources or human abilities.

Instead, much of the difference seems to be that the poor nations (many of which are democracies) are those that more often adopted dumb policies, policies which hurt most everyone in the nation. And even rich nations frequently adopt such policies.
These policies are not just dumb in retrospect; typically there were people who understood a lot about such policies and who had good reasons to disapprove of them beforehand. It seems hard to imagine such policies being adopted nearly as often if everyone knew what such "experts" knew about their consequences. Thus familiar forms of government seem to frequently fail by ignoring the advice of relevant experts (i.e., people who know relevant things).
Would some other form of government more consistently listen to relevant experts?

Even if we could identify the current experts, we could not just put them in charge. They might then do what is good for them rather than what is good for the rest of us, and soon after they came to power they would no longer be the relevant experts. Similar problems result from giving them an official advisory role.

"Futarchy" is an as yet untried form of government intended to address such problems. In futarchy, democracy would continue to say what we want, but betting markets would now say how to get it. That is, elected representatives would formally define and manage an after-the-fact measurement of national welfare, while market speculators would say which policies they expect to raise national welfare. The basic rule of government would be:

When a betting market clearly estimates that a proposed policy would increase expected national welfare, that proposal becomes law.

Futarchy is intended to be ideologically neutral; it could result in anything from an extreme socialism to an extreme minarchy, depending on what voters say they want, and on what speculators think would get it for them.
Futarchy seems promising if we accept the following three assumptions:
1)Democracies fail largely by not aggregating available information.
2)It is not that hard to tell rich happy nations from poor miserable ones.
3) Betting markets are our best known institution for aggregating information.

GDP is today the most common measure of national wealth. It seems hard for frequent travelers to escape the impression that people in high GDP nations tend to be richer and better off than those in low GDP nations. Economists thus tend to be willing to recommend policies that macroeconomic data suggest are causally related to increasing GDP. It seems that it is not that hard to, after the fact, tell rich satisfied nations from poor miserable ones. GDP may be good enough, and with the full attention of our elected representatives, we should be able to do even better, such as by including happiness, inequality, health, leisure, and environment measures.
If we can measure how rich nations are, we can use such measurements to settle bets. This is good because betting markets, and speculative markets more generally, seem to do very well at aggregating information.

To have a say in a speculative market, you have to "put your money where your mouth is." Those who know they are not relevant experts shut up, and those who do not know this eventually lose their money, and then shut up. Speculative markets in essence offer to pay anyone who sees a bias in current market prices to come and correct that bias.
Speculative market estimates are not perfect. There seems to be a long-shot bias when there are high transaction costs, and perhaps also excess volatility in long term aggregate price movements.

But such markets seem to do very well when compared to other institutions. For example, racetrack market odds improve on the predictions of racetrack experts, Florida orange juice commodity futures improve on government weather forecasts, betting markets beat opinion polls at predicting U.S. election results, and betting markets consistently beat Hewlett Packard official forecasts at predicting Hewlett Packard printer sales. In general, it is hard to find information that is not embodied in market prices.

A betting market can estimate whether a proposed policy would increase national welfare by comparing two conditional estimates: national welfare conditional on adopting the proposed policy, and national welfare conditional on not adopting the proposed policy.
Betting markets can produce conditional estimates several ways, such as via "called-off bets," i.e., bets that are called off if a condition is not met.

Whether this is just fancy write up or the prediction of the future ? Any one wanting to bet on this ?




p.s:However The Trap a three part BBC Video documentary by Adam curtis is definetly an eyeopener, and answers the question is Market economy the real panacea of all ills ?(will definetly post it in My blog)

Commodity Futures Markets,Singer-Prebisch thesis and Jevons Paradox

The Singer-Prebisch thesis (often referred to as the Prebisch-Singer thesis or sometimes the Prebisch-Singer hypothesis) is the observation that the terms of trade between primary products and manufactured goods tend to deteriorate over time. Developed independently by economists Raul Prebisch and Hans Singer in 1950, the thesis suggests that countries that export commodities (such as most developing countries for agriculutral commodities ) would be able to import less and less manufactured goods for a given level of exports.

Singer and Prebisch examined data over a long period of time suggesting that the terms of trade for primary commodity exporters did have a tendency to decline. A common explanation for the phenomenon is the observation that the income elasticity of demand for manufactured goods is greater than that for primary products - especially food. Therefore, as incomes rise, the demand for manufactured goods increases more rapidly than demand for primary products.

Some regard the Singer-Prebisch thesis as important because it implies that it is the very structure of the market which is responsible for the existence of inequality in the world system. This provides an interesting twist on Wallerstein's neo-Marxist interpretation of the international order which faults differences in power relations between 'core' and 'periphery' states as the chief cause for economic and political inequality. As a result, the Singer-Prebisch Thesis enjoyed a high degree of popularity in the 1960s and 1970s with neo-marxist developmental Economists and provided a justification for import substitution industrializing (ISI) policies and an expansion of the role of the commodity futures exchange as a tool for development.

Properly understood, the Singer-Prebisch thesis is an observation, not a theory. Singer and Prebisch noticed a similar statistical pattern in long-run historical data on relative prices, but such regularity is consistent with a number of different explanations and policy stances. Later in his highly influential career, Prebisch argued that, due to the declining terms of trade primary producers face, developing countries should strive to diversify their economies and lessen dependence on primary commodity exports by developing their manufacturing industry. Few economists today would agree that an import-substitution stance is the correct response to declining terms of trade.

The Singer-Prebisch thesis has lost some of its relevance in the last 30 years, as exports of simple manufactures have overtaken exports of primary commodities in most developing countries outside of Africa. For this reason, much of the recent research inspired by the Singer-Prebisch thesis focuses less on the relative prices of primary products and manufactured goods, and more on the relative prices of simple manufactures produced by developing countries and complex manufactures produced by advanced economies.(CHINA AND DENGISM(my friend says dengism is a bad word in telegu!))

However I was not able to personally think about the relevance of this to Crude Oil,which made me think more,get more confused and make me further search for answers.

I finally did hit upon an answer which made my confusion permanent! (and not temprorary as usually the case).
It was the Jevons Paradox,

In economics, the Jevons Paradox (sometimes called the Jevons effect) is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource. It is historically called the Jevons Paradox as it ran counter to popular intuition. However, the situation is well understood in modern economics. In addition to reducing the amount needed for a given output, improved efficiency lowers the relative cost of using a resource – which increases demand. Overall resource use increases or decreases depending on which effect predominates.

What this means is that Because we think crude oil is expensive and hence make investments in enhancing energy efficeny then contrary to popular perception, the Demand for Crude oil would INCREASE FURTHER!!!!(yeah I am right and I smoke only tobacco nothing else mixed).

One way to understand the Jevons Paradox is to observe that an increase in the efficiency with which a resource (e.g.,Fuel/ crude oil) is used causes a decrease in the price of that resource when measured in terms of what it can achieve (e.g., work). Generally speaking, a decrease in the price of a good or service will increase the quantity demanded .
Thus with a lower price for work, more work will be "purchased" (indirectly, by buying more fuel).

The resulting increase in the demand for fuel is known as the rebound effect. This increase in demand may or may not be large enough to offset the original drop in demand from the increased efficiency.
Jevons Paradox occurs when the rebound effect is greater than 100%, exceeding the original efficiency gains.

Consider a simple case: a perfectly competitive market where fuel is the sole input used, and the only determinant of the cost of work. If the price of fuel remains constant, but the efficiency of its conversion into work is doubled, the effective price of work is halved and so twice as much work can be purchased for the same amount of money. If the amount of work purchased more than doubles (i.e. demand for work is elastic, the price elasticity is larger than 1), then the quantity of fuel used would actually increase, not decrease. If however, the demand for work is inelastic, the amount of work purchased would less than double, and the quantity of fuel used would decrease.

A full analysis would also have to take into account the fact that products (work) use more than one type of input (e.g. fuel, labor, machinery), and that other factors besides input cost (e.g. a non-competitive market structure) may also affect the price of work. These factors would tend to decrease the effect of fuel efficiency on the price of work, and hence reduce the rebound effect, making Jevons Paradox less likely to occur. Additionally, any change in the demand for fuel would also have an effect on the price of fuel, and also on the effective price of work.

Bottom line let commodity analysts keep worrying about the supply and demand of crude oil,we proletarians will keep using it anyway it is all about the degree of crib at the petrol bunk as they say.

Soyabean Crush

There was this very interesting question posted to me by a gentleman who had asked me a question based on one of my earlier posts on EFP.

I had an opportunity to work on a similar problem when I was in Indore,this was my answer,comments as usual welcome.

Dear Srinivasan,

The query is related to Soybeans Hedging.

The scenarios is:

Supplier "A" in Latin America wants to sell 65,000 MT of Soybean seeds. Processor "B" is into Crushing the Soybeans and selling principal by-products such as Soymeal and Soy Oil.

1. Supplier "A" is already short on CBOT with equivalent Future lots (say 475 Lots) at say 13.5 $ per bushel.
2. Procesor "B" negotiates with Supplier "A" to buy the Soybeans at say CBOT + 20 cents
3. Supplier "A" transfers these lots to Processor "B". Thereby, Supplier "A" selling the Soybeans at (13.5$ + 20 cents) per bushel.
4. Processor B, curshes the seeds and sells the Soymeal and Soy Oil at existing market prices.
5. Whenever a physical sale for the Soymeal is made, Processor buy equivalent number of Soybean lots, to close out the long positions.

My query here is to understand, how is the hedge working for the processor "B" when the underlying commodity bought is Soybean seeds, but the sale is of Soymeal and Soy Oil.

It would be of great help, if you could help me understand the above scenario.

Thank you Srinivasan.

Best regards,
Jinendra

Firstly i dont think there can be a 100% hedge,not wanting to sound pompous or philosophical in case of your question in such cases it is better that you track the BCX price rather than the soyabean price.

BCX is synthetic in nature meaning Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices.
The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.
Soybean Crush prices (BCX) are synthetically generated using CBOT soybean, soybean oil and soybean meal futures prices. The result of the soybean crush calculation is then rounded to the nearest quarter of a cent. This is not a tradable futures contract. It is intended for informational purposes only.

The Synthetic Soybean crush is based on CBOT Soybean, Soybean Oil, and Soybean Meal futures prices; in order to calculate the crush, prices of Soybean Oil and Soybean Meal need to be converted into dollars and cents per bushel.

To convert prices:
Soybeans: No conversion required
Soybean Meal: 44 lbs. (48% protein meal) / 2,000 lbs (per ton) = 0.022 x price of meal
Soybean Oil: 11 lbs. (oil per bushel) x price of oil

To calculate the Crush:
[(Price of Soybean Meal ($/short ton) x .022) + Price of Soybean Oil (¢/lb) x 11] – Price of Soybeans ($/bu.)
For example, if August Soybean Meal, Soybean Oil and Soybean futures prices were at $297.20/ton, $.3340/pound and $9.565/bushel, respectively, the Crush would be calculated as (297.20 x .022) + (.3340 x 11) - 9.565 = $.6474/bushel.
The Synthetic Soybean crush values are rounded to the nearest $0.0025/bu and displayed in eighths, the same way as soybean futures quotes. Therefore, the sample crush value of $.6474 would be displayed as 64'6 (64 3/4).

Cheers