Kurt Johnson

James Hamilton has a really nice running series on oil prices at his blog. From a recent post on how supply factors are keeping prices up:

One school of thought points to the $2 billion decline in global spending on oil exploration that followed the oil price collapse of 1997, along with inadequate investment in refineries needed to process the heavy, sour crude currently available. A second school of thought argues that it is not physically possible to increase production further, not in 2005, nor in 2010.

Obviously the peak oil school of thought is #2. I personally believe that #1 is mostly true although I am second guessing myself as the back end of the Nymex crude curve is still over $60, much higher than I would have expected. To the extent that I agree with #2 I still think that $65-70/BBL is higher than fundamentals warrant; trying to figure out the long term fundamental price based on the cost of new supplies is a complicated exercise that I haven’t attempted but off the cuff I would expect something more in the $40-50 range unless demand growth continues at the pace of the last 3-5 years (so it follows that I believe we will see a significant slowdown in demand growth due to a general economic pullback in the US or Asia over the next 2 years).

A chart I haven’t seen (but would like to see) is how much oil supply comes online at different prices; e.g., 16mmB/D at $20, then 2mmB/D conventional supplies at $30, 2mmB/D of oil sands at $40, etc. Even then this is a pretty difficult idea to convey since these prices are subject to other factors; oil sands production is highly dependent on cheap natural gas (or other heating fuel), incremental production of heavy sours isn’t really useful until the refinery capex cycle can add coking/hydrotreating capacity to process the heavy/sour (2-5 year cycle), etc.

The World Bank has published a study from India with interesting findings on public vs. private medical care:

The quality of medical care received by patients varies for two reasons: differences in doctors’ competence or differences in doctors’ incentives…The authors find three patterns in the data.

First, what doctors do is less than what they know they should do-doctors operate well inside their knowledge frontier.

Second, competence and effort are complementary so that doctors who know more also do more.

Third, the gap between what doctors do and what they know responds to incentives: doctors in the fee-for-service private sector are closer in practice to their knowledge frontier than those in the fixed-salary public sector. Under-qualified private sector doctors, even though they know less, provide better care on average than their better-qualified counterparts in the public sector.

These results indicate that to improve medical services, at least for poor people, there should be greater emphasis on changing the incentives of public providers rather than increasing provider competence through training.

Found via Adam Smithee.

On the advice of a classmate from Pakistan I’m reading Charlie Wilson’s War. Charlie Wilson was a US Congressman who championed the mujahideen and led the US government in boosting support for the war from a few million dollars per year to around a billion per year. Beyond the humorous stories about Charlie Wilson it’s a great exposition the “enemy-of-my-enemy is my friend” school of policymaking and the imperitives of the CIA in the developing world during the Cold War. More than anything it illustrates the moral relativism that politicians (and voters) display about war and guerilla tactics; the same things that were OK for the US to support in the past are now clearly unacceptable.

On the truculence of the Afghan mujahideen (p110) in a battlefield hospital:

To Wilson it was like a scene out of the Old Testament. When the elders invited the Texan to speak, he delivered what he thought would be just the right message. “I told them that they were the most courageous people in the world and I said, We’re going to help you. None of your families will suffer from lack of shelter and food. I pledged that their soldiers would not be left to die in agony and that we would give them millions in humanitarian assistance.

An old man rose to respond. He told Wilson he could keep his bandages and rice. What they needed was a weapon to the destroy the gunships…It was at this moment that Charlie Wilson knew he was in the presence of a people who didn’t care about sympathy. They didn’t want medicine or charity. They wanted revenge.

Some prior art for the current crop of IED-makers (p 162):

In the 1960s this eminently forgettable-looking man [a CIA Office of Technical Services expert]…spent a year in Laos helping run the secret war and three years in Vietnam with thirteen devilish tinkerers serving under him at the old Saigon embassy. There he was given carte blanche to play dirty with the Vietcong. One of his favorite tactics was to secrete both a homing device and Semtex plastique [explosive] into typewriters offered for sale at shops the Vietcong were known to frequent. Alper was then able to follow the typewriter by its signal and identify the enemy nest. When ready, this American with the kindly face would detonate the Semtex charge with an electronic signal, strking a blow for the war effort.

On the balkanized nature of the Afghan people - does this sound like anywhere else we’ve got a military action? (p 224)

“Hart [the CIA field officer managing tactics in Afghanistan] understood that, like most Americans who’d discovered the Afghan war, Wilson was in the initial stages of unconditional adulation. Typically that meant seeing the mujahideen as pure of heart, brave, intensely religious, and worthy of total support. Like all newcomers, Wilson appeared even to have embraced the fantasy that these tribesmen could weld themselves into a single unified resistance.

Hart had gone down this path himself, but that had been long ago. “Akhtar and I used to sit around talking about how nice it would be if they could create the equivalent of the Free French and find themselves and Akbar de Gaulle” remembers Hart. “But the Afghans are hardly a people, much less a nation. They are a nation of tribes constantly at war with each other. They are very heterogeneous, with an extreme ethnocentricity which makes them not only hate or suspect foreigners but Afghans living two valleys away.”

Hart had made his peace with this profound flaw in the Afghans and had even come to believe that a large part of their potency as a guerilla force came from the fact that they were disunited. It made it hard for them to coordinate their military activities, but it also meant there was no single leader whose head could be cut off to destroy the insurgency. In fact, there was no centralized anything except a distribution system for weapons and support…

There’s a couple of interesting comments in the blogosphere worth checking out after you read the book; I also saw one at Amazon from a Soviet conscript who was in Afghanistan in 1984 and notes that from their perspective the “war” didn’t really exist as a war until the US boosted funding.

Coincidentally when I ordered this book Susanne was just finishing the novel “Kite Runner“, also about Afghanistan in the 1980s-present. She recommends it highly as one of the most moving novels she’s ever read; I’ll be getting to it soon.

Results for the CFA Exam came out today; I passed Level II. Any potential employers reading this are encouraged to interpret this as a signal that I am highly trained, motivated, and likely to succeed in the industry I just dogged in the last post.

Personally this presents a conundrum - do I forego Wharton opportunities for 8 weekends next spring to study for the final level (3) ? Most likely I’ll go halfway - choose to do mostly Wharton stuff but take the test anyway for the slim chance I can pass with minimal prep.

I am surprised by the high L2 pass rate (56%)…I expected something in the mid 30s based on how I felt after the test and the tone of actions from the CFA Institute in the last 12 months.

Quoted at Infectious Greed:

… the more experience I have, the more I realize that the whole idea of business school is completely self-perpetuating. Heads of organizations had to go, so they require (either explicitly or otherwise) those below them to go, who in turn do the same. It’s a badge of completion that comes with funny acronyms, a well-connected network and an amazing ability to make the simple sound complicated. All in all not too different from a college fraternity……I’m surprised [MBA] diplomas don’t come with a paddle. Yikes.

As I’ve noted before the most powerful predictor of graduate performance is usually the quality of students supplied to the school rather than anything the school applies to them after matriculation. There’s certainly some truth in the stereotype of a top tier MBA as a credentialing process; companies may be taking the $25,000 they’d pay a headhunter to find a reasonably bright, ambitious, personable team player and instead paying the student (who in turn passes the $25,000 back to the school via tuition). In this model an elite MBA’s admissions office is earning their wage as a corporate headhunter, one degree and 30 months removed from placement.

Controlling for this effect, does the 2 year MBA program add value or should we just stop the process as soon as admissions notifications go out and pick up our new job offers? There’s certainly some graduates who apply almost nothing from the MBA curriculum and other graduates who generate huge gains to both themselves and society using the frameworks from school. But what about most people in the middle? What determines whether the degree is a net gain or net loss? By the way, I think picking on MBAs here is aiming a little high - why not take on all of the degree programs in social work, art history, wildlife management, or “[XYZ demographic] studies” that probably never get used? Relative to a professional degree in applied mathematics/sociology/management thesue are much easier targets to abuse.

I’ve heard concern from Brad DeLong and Warren Buffet about the amount of talent and energy seeking out a limited number of jobs in finance and banking. I.e., this is a field that should require relatively small amounts of labor but we have tens of thousands of people tripping over themselves in the job lottery. Maybe a fair analogy would be all of the 98th percentile athletes in high school or college who neglect their studies to invest time in ballhandling skills - they’re hoping for the pro ball career that will make them $20mm by age 35 while denying or ignoring that they’re only 98th percentile, not the 99.99th + holding the “lottery ticket” that will actually make their dream work.

In the analogy society is losing out because a lot of people who could contribute intellectually and materially (as skilled workers) instead roll the dice on becoming a star, many of them squandering very tangible opportunity and becoming relatively unskilled labor when their dream doesn’t work out. By the time the rationing process happens, sorting winners from losers, the losers have made huge investments that they’ll never recoup. You could probably make a case that MBAs do the same thing with corporate finance; would business and society work better if most MBAs spent more time on organizational behavior, leadership, or process design and less on the nuances of efficient portfolios and LBO mechanics that 99% of students will never get a chance to apply?

From the Globalization Institute:

Some of the most spectacular changes for the good during the last few decades have come about in countries who opened up their economies to the outside world. China - home still to more malnourished children than any other country - saw a 49 per cent drop in underweight infants in the 1990s. Mexico, which signed up to the North American Free Trade Agreement (NAFTA) had a 46 per cent reduction.

Obviously correlation isn’t causation, but this seems like an enormous improvement in a short amount of time. What other factors could explain this besides liberalizing food markets in China and Mexico?

It’s like the first month of college all over again. So far three out of four classes have made examples using alcohol merchandising; are we really lushes or is it just the faculty’s perception of us?

Other things I’ve noticed here:

I’m going to avoid platitudes about how incredible everybody/everything is here, but I will say that I’m learning a fair amount so far; I don’t think I’ll be the guy who drops out because he knows everything already.

About a month ago I switched from Readyhosting to Bluehost. I’m unequivocally glad I did; Bluehost offers vastly more powerful database/ftp/http tools as well as more useful analytics and accessibility plus 8x the disk space, all for roughly the same price. Highly recommended.

Daniel Drezner has a couple of posts up exploring why US Information Technology jobs (at least relatively skilled ones) may not be vanishing as expected from all the outsourcing of the last few years. This seems strange at first but makes more sense if you think about IT as an investment that companies weigh against other investment opportunities. If outsourcing means that companies get more bang for their IT buck it makes sense for companies to increase IT spending. Whether this works or not depends on whether you think of IT as generating returns (investment) or simply overhead to be minimized (like insurance or taxes).

Say a firm generates $1000 in profits from $50 in IT expense. If outsourcing cheapens the current IT service level to $40 without affecting profits the company might maintain this service level and book the $10 extra profit. However consider a scenario where the old IT expense contributed a 10% net return - $55 incremental revenue on $50 IT cost. Somehow the company determined that given this 10% level of return the right investment level was $50. Post-outsourcing the return is $55 revenue less $40 expenses, or 37.5% return ($15/$40). At this return on investment the company realizes IT investments are much more attractive than they used to be and boosts IT spending to a new, higher equilibrium level - more than the $50 spent pre-outsourcing. The obvious corollary to this is that the growth in US IT demand will be for higher skilled managers and project staff; transactional and low skill IT work that can be outsourced will necessarily go away, echoing historical demand shifts to higher skill employees in US manufacturing/agriculture/etc.*

I don’t think this is pie-in-the-sky; although the $ return from IT is notoriously difficult to quantify there are plenty of intuitive examples where falling prices cause total expenditures to go up….mom and pop businesses that won’t automate their records if it costs $25k/year but will automate for $10k/year. Companies who do data mining or AP/AR audits can now be more thorough…companies that used to only have one mainframe PC now buy cheap desktops for everyone in the office. In all cases productivity and expenditure rise together.

Hat tip to Marginal Revolution for the DD article. I started thinking this way after reading a post a few months ago (alas, I can’t find it now) showing that better gas mileage on vehicles over the past few decades has been negated by consumers driving longer distances, keeping net consumption flat. A somewhat related post is at Energy Outlook.

*For the US to have a net gain in IT payroll there needs to be greater growth in IT spending (because of the new lower price for IT) than the growth in the fraction of IT spending sent offshore. E.g., if baseline IT spending is $200B and offshoring 25% of it creates a 20% spending boost the net US gain/loss to domestic IT should be 200*1.2*.75-200=-$20B - in this case there is a net loss although it less than half bad as the basic “25% outsourced” figure indicates.

Today Susanne and I took a day trip to Gettysburg, PA; I am pathetically ignorant of the tactical history of the US Civil War (or “War of Northern Aggression”, as my old manager from NC called it) but it was time well spent regardless. The battlefield is quite large and covered with thousands of monuments (but not so many explanatory displays) so most people get a self-guided tour on tape and drive themselves around a marked auto tour route. There are live guides who will ride in your vehicle and get out to explain the battles ($40 for 2 hours); this or the $13 auto-tour CD is a much better deal than paying $25/head to ride the bus tour and listen to recorded audio on headphones.

Walking through Gettysburg National Cemetery was quite an experience; the cemetary is smaller than I expected and right in the middle of a normal American town. I think I expected something more like the WWII era cemetery I remember visiting during grade school. I started thinking about how civil wars in general might be mitigated and how I (or a “rational actor”) would react to a war on home soil - i.e., fight, flee, resist, etc. Unfortunately I don’t have any brilliant insights yet….