Jack’s Links – Edition #1

My plan is to save some of the good links I read for posterity. Or myself, when I mention them in conversation but can’t find them for the life of me. I haven’t figured out if this will be weekly, monthly, or just whenever I feel like it, but since I just started, I’ll go back an arbitrary amount of time.

Michael Kitces puts out his links each week, always pretty good. This week’s was particularly chock-full of interesting articles. I won’t bother curating them since he already did it. Needless to say, if you’re in financial planning, you should read what he puts out each week.

Optimal asset location, back-to-back Kitces, though this link is original content from him. Article on asset location. Kitces touches on how low-interest rate environments affect things, though he mostly focuses on the fact that most theoretical CFA-type analyses assume stocks use turnover assumptions which are implausibly low (see: dividends).

“Rates are artificially low” – I’ve been hearing this one more and more lately. This article from Scott Sumner helps make the point that rates are only too low if they are below equilibrium, and if equilibrium is ~2% inflation, then rates are artificially high.

Don’t penalize savers – Scott Sumner – I think one of the biggest topics that Americans will have to grapple with in the coming years is whether pre-retirement spending should be given a “bonus” by giving more tax-payer subsidized post-retirement income to those with less assets (and therefore less other income). My description is already feeling convoluted, but Scott’s example is great.

California drought – too many people in too dry of a climate?

Video games make kids smarter. Or smart kids like video games. Or something.

That goes back about a month… there were probably five times that many articles that deserve links, but I’m bad at capturing them all.

 

Oil and the United States

Author’s Note: Originally written as a letter on 12/29/2014, somehow still relevant.

The plummeting price of oil has become a major topic of conversation – and with prices that feel more like 2005 than 2015 – no wonder.  How has oil gotten so cheap, and is it too cheap?

Before we get into the why, how, and where next, let’s address a myth: America is not a net oil exporter. There are lots of ways to twist the numbers, but when it comes down to it, we import about 9 million barrels a day and export about 4 million.[i] We are also net importers of natural gas.[ii] Dispelling this myth is key; because while we have been the largest producer of oil this year, we are not totally insulated from the rest of the world.

Back to, “How has oil gotten so cheap?” In his most recent memo, Howard Marks astutely describes how high oil prices tend to lead to lower oil prices and vice-versa.[iii] The cliff notes version is: Supply and demand. The question is then, is the price too low?

While figures for the rest of the world are harder to interpret, less audited, and have the ultimate wildcards – OPEC and Russia – involved, we can look to America’s own figures for a baseline.

Per figures cited by the IMF,[iv] the current breakeven price (i.e., the price below which production is not profitable) for shale drilling in the US is between $40 and $80 per barrel. About half of North American shale production is profitable at a price of $50. The break-even price for shale is important because shale wells represent about 95% of new wells being drilled in the US today.[v]

Asking, “Is $60 the right price for oil?” is the wrong question. The right question is, “Is $60 the wrong price?” Looking into our own back yard, it looks like $60 is not the wrong price; most wells will continue to produce at $60. However, when we look abroad, we see increased levels of economic and geopolitical risk; we also see rapidly industrializing countries with billions of people. These factors, among many others, help explain why $80 or $100 oil isn’t the wrong price either.

While $60 oil seems to be on the low end of sustainable prices, the more people who think that oil is bound to go up, the more likely it is to stay flat. This phenomenon was described best by Yogi Berra, talking about a restaurant he used to frequent in St. Louis, “Nobody goes there anymore, it’s too crowded.”

Nobody has a crystal ball to know where the price of oil is headed, but I do know that following the crowd comes with the danger of being trampled by it.

[i] http://www.eia.gov/dnav/pet/pet_move_wkly_dc_NUS-Z00_mbblpd_w.htm

[ii] http://www.eia.gov/naturalgas/importsexports/annual/#tabs-supply-1

[iii] http://www.oaktreecapital.com/MemoTree/The%20Lessons%20Of%20Oil.pdf

[iv] http://blog-imfdirect.imf.org/2014/12/22/seven-questions-about-the-recent-oil-price-slump/

[v] http://energy.gov/sites/prod/files/2013/04/f0/how_is_shale_gas_produced.pdf