Somehow, correspondent High Plateau Drifter was inspired to write two pieces in January. Here is the latest:
OK, so we have begun to hear hints from oil producers including especially Russia and Saudi Arabia, Iran, Iraq and Syria - unlikely allies to be sure - that they should come to some kind of agreement on production quotas. What the market seems to forget is that the demand for oil and energy is remarkably inelastic relative to say, new motorcycles or new granite counter tops, for example.Previously by Skeptics to the Ramparts, Fun on the Permanently High Plateau, Surfing the zero bound along the permanently high plateau, and Back To The Future!
Energy use is surprising stable even in recessions. What inelasticity of demand means is that oil producers could cut production by perhaps 6 percent and increase sales income by 30% to 50% from current levels on lower volume of exports. Thus, reaching an accord on production is an absolute no brainer for the producing states.
Now the big dissenter at present is Iran, which, due to past sanctions has had what it believes to be far less than its fair share of the market. It is not willing to decrease production but will demand an increase in production. But then the Iranians are not fools, they understand inelasticity of demand. They are not going to want to export oil at $25 per barrel. So the real issue here is how much of a production increase is Iran going to demand and what will it take to get the other big exporters, dependent upon oil revenue, to decrease their production
As investors who are not in on the ongoing talks and not privy to the precise calculations of the players, the question is not if but when they agree, behind the scenes, to cut production while giving Iran an increased quota. And of course the truth is that these other players will get a better deal while Iran's welfare and other costs are relatively low due to budget constraints imposed by past sanctions rather than to wait until their expenses of legitimizing rule of the regime (pace Joseph Tainter) have risen to the Saudi level.
Bottom line, we will have $80 oil sooner than most investors think.
OK, now on to my favorite, FB.
What we saw with the latest earnings report and ad revenue numbers is exactly what you would expect when the bazillion social media and tech startups see that funding is drying up – a blast of desperate ad spending as the end of easy VC money comes clearly into view. I am expecting next quarter's ad revenues to be up but for the growth rate to slow. I will be modestly short ahead of FB's Q2 report, and increasing that short quickly if FB stalls out.
Keep your eye on the Tech Crunch Bubble Index going forward.