In Lehmann's Terms

Sunday funnies

For the last few years, I've been generally of the opinion that Scott Adams' output is moving long past its sell-by date, but this Sunday's Dilbert on the economics of oil markets is an all-time classic.

All Hail the Gypsies (cabs, that is)

In 1931, at the height of the Great Depression, New York City had a population of about 6.9 million, took in roughly 1 million out-of-town commuters every day, and had 21,000 licensed medallion cabs (the traditional metered "yellow cabs" that pick up fares without prior reservations)  to service them all.

Seventy-four years later, the city's population has hit 8.2 million, it now sees 6.7 million commuters making the daily jaunt into the city from Jersey, Long Island, Connecticut and surrounding environs, and the number of available taxi medallions is....just a shade over 12,000.

The credit for this counter-intuitive development goes to a Depression-era relic called the Haas Act. Passed in 1937 in an attempt to stabilize cabbie salaries, Haas capped the number of medallions issued by the city at 13,595.

Attrition brought that figure even lower over the next few years, before rising again to 11,787 in the late Forties. And other than the addition of just 400 new medallions in the early 90s, the number of licensed cabs has remained roughly constant since World War II, even as both the city itself and the demand for taxi services has exploded. Only the growth of livery services -- appointment-only car services and so-called "radio cabs," also known as "black cars," that typically contract with major hotels and employers -- has staved off a paralyzing crisis.

Of course, the city now finds itself in a paralyzing crisis, nonetheless, thanks to that other early 20th Century relic -- the transit workers union. And proving Mencken's dictum that, for every complex problem, there is an an answer that is clear, simple, and wrong, Mayor Bloomberg's initial response to the MTA strike crisis is a double-barreled shot of wrong-headedness. First, he imposes onerous new HOV restrictions on the city's commuters, saddling New York's Finest with the crucial public safety task of counting heads. Then, he warn taxi operators who dare think the proper response to a massive and sudden increase in demand would be to raise prices that he  will not tolerate "fare gouging" and that he has "sent inspectors out to investigate and I encourage anyone who has encountered this to call 311 and report it."

(Le sigh)

Alas, Bloomberg won't acknowledge the 8,000 pound dinosaur in the room: the Haasasaurus rex. Price-gouging is, after all, a much easier thing to pull off when you are operating within a government-imposed monopoly system specifically designed to enable such a thing. Were the Act to be struck down -- or, should so radically rational a move be just unthinkable, then at (truly) the very least, temporarily suspended -- then the most deleterious effects of the transit strike would, likewise, quickly dissipate. A million gypsy cabs could bloom, enough to serve every ride-less Gothamite. The bridge-and-tunnel crowd, long-mocked for their bad perms and their taste in cheesy techno, could be hailed (literally) as saviors.

But hey, why wait in vain for Bloomberg or any of his fellow dunderheads on the City Council to come to anything approximating a sensible conclusion? If the union's members can openly flaunt their lawbreaking, then perhaps it's time to demonstrate that civil disobedience runs both ways, muthaf*&ka.

The power is in your hands, New Yorkers. The next time you hitch a ride, offer the driver a little something extra for his trouble. Gas, grass, or ass, as the saying goes. Commuters of the world unite! You have nothing to lose but your change!

'Price gouging' on the rubber chicken circuit

Over at the Knowledge Problem, Michael Giberson wonders why no one in Congress is calling for an investigation of 900% mark-up rates for political fundraising dinners:

WASHINGTON -- Two Northwest senators, Republican Gordon Smith of Oregon and Democrat Maria Cantwell of Washington, have introduced legislation to prohibit gasoline price gouging during national emergencies.

Cantwell is concerned oil companies are taking advantage of Hurricane Katrina to raise prices far beyond additional costs....

Of course, last year in her role as co-chairwoman of Kerry's campaign in Washington, Cantwell had no problem charging $1000 for a meal at Seattle's Westin Hotel. (See: The Seattle Times.)  Either meals at the Westin in Seattle are very, very costly, or Cantwell was raising prices far beyond costs.

Tierney's Wager

Tearing a page from Julian Simon's playbook, New York Times columnist John Tierney has laid down $5,000 against the prognostications offered by Matthew Simmons -- an investment banker, Bush Administration consultant, and author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy -- that oil prices will hit triple digits by Jan. 1, 2011.

Actually, the terms of the punt, as Tierney describes them, are even more dramatic than the claims in the book.  Simmons says now that he expects U.S. light sweet crude oil to not only surpass $100 a barrel, but to climb north of $200:

Mr. Simmons said he favored a simpler wager, based on his expectation that the price of oil, now about $65 per barrel, would more than triple during the next five years. He said he'd bet that the price in 2010, when adjusted for inflation so it's stated in 2005 dollars, would be at least $200 per barrel.

Remembering a tip from Julian, I suggested that we use the average price for the whole year of 2010 instead of the price on any particular date - that way, neither of us would be vulnerable to a sudden short-term swing as the market reacted to some unexpected news. Mr. Simmons agreed, and we sealed the deal by e-mail.

I think I'm beginning to see why Mr. Simmons moved out of the rough and tumble world of investment banking and into the less demanding field of punditry. This is a fool's wager, and you don't even need to be a proponent of Simonian optimism in the power of human ingenuity to see why.

There is, of course, ALREADY a huge market of potential betting partners interested in the long-term price of oil. It's called the commodities market. Every day, billions flow through exchanges like the N.Y.M.E. on futures contracts, including those on oil futures for the five-year window.  In fact,  open interest in light sweet crude futures for delivery in Dec. 2010, the time period in question, currently sits at 21.4 million barrels. 

The going rate, you ask?

$60.56

Mind you, that figure -- unlike the one Simmons and Tierney will be using -- is UNadjusted for inflation. (And it bears mentioning that framing this wager in 2005 dollar terms would seem a remarkably ill-advised concession on Simmons' part. If oil really did spike as sharply as he projects, one of the surest effects one would anticipate is an accompanying run-up in CPI. Adjusting 2010 prices for inflation could thus serve to assume away the very effect you were looking to measure.)

It's also a figure that exceeds the projections of many of those closest to the market. Goldman Sachs -- the largest commodity trader on Wall Street -- made headlines just last week by raising its five-year projection TO $60 a barrel from $45.  But even that projection leaves Goldman as among the more bullish houses on oil. Merrill Lynch, which also raised its long-term projection last week, still only forsees $42 a barrel oil in 2010.

And the oil companies themselves -- who obviously have a lot on the line when it comes to this question -- have been holding firm on projections that see long-term prices somewhere in the range of $20 to $35 a barrel. In fact, Goldman cites this evidence as relevant to their projections,  inferring that big oil isn't likely to invest significantly in expanding productive or refining capacity so long as they're under the impression that $60 a barrel is but a short-term aberration.
 
So, two questions immediately come to mind.

A) What does Simmons think he knows that all of these other cats with much bigger stakes on the line don't? (Presumably, the book is meant to answer that question) and...

B) If he really believes oil is set to rise to $200 a barrel over the next five years, then why would he waste his time looking merely to double his money in a bet against a journalist, for chrissakes, (a notorious lot of welchers, we are) with a whole set of onerous rules to qualify for the win, when he could be spending that cash on futures contracts, enjoy a much greater margin for error, and have the chance to more than triple his money?

But then, maybe winning the bet isn't the point, and maybe Simmons isn't quite so foolish as he seems. After all, had you heard of Matthew Simmons before this? For just $5,000, he may have just placed one of the shrewest publicity buys in recent memory.