$2,099.20 per Gigabyte

This one has a relationship to the political bullshit tornado we all find ourselves in, but it is personal as well.

I was prompted to write this by a section of the Slate Money podcast discussing the latest attempt by the wireless phone companies T-Mobile and Sprint to combine. They have been trying out various acquisition schemes on the regulators and financiers for the past decade. One of the main objections to this would be the reduction of the wireless players to three, Verizon, AT&T, and the Sprint/T-Mobile combo, thus reducing competition.

Another motivation is the recent revelation that in 2017 AT&T dumped $200,000 into the coffers of Essential Consulting, a shell company run by Trump’s fixer, Michael Cohen. As far as anyone can tell, Essential was brought into existence to handle the money to pay off Stormy Daniels. Supposedly a real estate consulting firm, it had no employees, no offices, no website, and essentially no activity except the suspicious transfers of six-figure sums from Russian oligarchs and large corporations and to Ms. Daniels and Cohen himself. AT&T was trying for its own merger at the time the money was transferred, in four $50k chunks.

Unrelated to my wireless thesis, but still interesting, the pharmaceutical giant Novartis made four payments of $99,980 to Essential just before Trump had a dinner meeting with the CEO of Novartis at the Davos conference in January 2018. Which is not suspicious at all. Here’s the executive summary of the report.

Back to wireless service and monopolistic practices.

I have wireless phone service from Verizon. I pay $35 a month for two gigabytes of data. This is extortionate, considering all the other fees I pay them, and compared to prices available in Europe and the UK. On the eastern side of the Atlantic there is no such thing as a locked phone. If you want service in the UK you can walk into any corner shop, buy a SIM card to stick in your phone, and get a gigabyte and a thousand minutes for the equivalent of about $12.50. That’s it. No other fees. You can buy more time and data for a similar price. If you don’t like the service you can walk into a shop, buy a SIM for a different service provider, stick it in the phone, and pitch the old one in the trash. Just like that, with no screwing around.

But that’s not the worst part of our American wireless duopoly (AT&T/Verizon). I do a lot of traveling up to near the Canadian border. Where I go the best wireless reception is from towers in Canada. As I drive near to the border my phone beeps and I get a message from Verizon. It informs me that I am now on Canadian roaming (even though I haven’t crossed the border) and that data will now cost $2.05 per megabyte. $2.05 doesn’t sound so bad until you multiply it by 1024 to get the price per gigabyte, which is $2,099.20. So, picking up a Canadian cell tower has increased my price per gigabyte from $17.50 to $2,099.20. I have spoken with a Verizon customer service representative, who unsurprisingly was at a loss to explain why radio waves increased in price by a factor of 120 when they crossed the line.

Oh, but Verizon has a solution. You can sign up for their Canadian roaming plan. It works like this: Once signed up, if you use your phone in Canadian cell range you get charged a $5 fee for 24 hours. You get to use your regular minutes and data at the regular price. If you dial your phone at 9:04 one morning you have until 9:04 the next morning before another $5 charge is applied.

On a simple monthly basis this would be like paying an extra $150 for my cellular service, which is still robbery. If you consider the possibility of using some tiny amount of data in a day, the cost per gigabyte could be well over $2,099.20.

AT&T has similar plans and pricing, in case you are wondering.

The existence of the Canadian roaming plan raises the obvious question of why Verizon charges $2,099.20 per gigabyte when it also seems able to afford roughly 1/20^th of that under the roaming plan.

Of course, the answer is, “Because they can.” The FCC is essentially a captured agency, the antitrust division of the Department of Justice is a joke, and Verizon and AT&T control 70% of the wireless market between them. Verizon is ready and willing to gouge the unprepared and then gouge them again for a lesser amount once they realize they have been had. It’s not going to change until the big wireless carriers are regulated like the near-monopolies they are.

S-7-170

I have been thinking a lot about guns and gun control. I’ve been thinking about this subject for years, but more so lately. With the energy for change brought on by the teenagers of Parkland Florida I thought I’d share an idea.

There is talk of reinstating the assault weapons ban. I am not all in on that, for a number of reasons.

First, an assault weapons ban leaves out pistols, a category of firearms that accounts for ten times more killings than rifles and shotguns combined. Semiautomatic pistols have eclipsed revolvers as the crime handgun of choice.

Second, the very term “assault weapon” or “assault rifle” is a technically vague term. I could point to semiautomatic rifles that are functionally the same as what we might call an assault rifle, but due to irrelevant details aren’t included in that category.

Third, even with the momentum behind the movement at the moment, an absolute ban has a near impossible road to enactment. The NRA has spent decades disseminating effective propaganda, and American public opinion has shifted in their favor. An absolute ban gets a 67% approval rating in the most recent Pew poll, but would be a non-starter in Congress.

I’d like to propose a definition and a procedure that would address most of the concerns and risks we now face, without enacting a de jure ban.

Undergirding this proposal would be the passage of a federal law requiring universal background checks for any firearm transfers. This has a real chance of passage, at least after the 2018 midterms. It got an approval rating of 97% percent in a recent poll, even among gun owners. Even NRA members approve of it, with about 85% support. Without universal background checks any other laws would be pointless.

First, the definition: S-7-170. This refers to the three factors that make military style semiautomatic rifles and semiautomatic pistols uniquely dangerous:

Semiautomatic mechanism. This allows the shooter to fire as fast as he can move his finger on the trigger.

High capacity magazine. Aftermarket magazines are available for most semiautomatic firearms that allow upwards of 100 shots without reloading. Twenty and thirty round magazines are common, and available even for handguns. Jared Laughner, who shot Congresswoman Gabby Giffords and 12 others, used a pistol with an extended magazine.

High powered cartridge. The lethality of a firearm, accuracy and rate of fire aside, is defined by muzzle energy. That is, the amount of force that can be imparted by the bullet at the time it leaves the firearm, generally expressed in foot-pounds. That can mean a large bullet travelling relatively slowly, or as with an AR-15 firing a 5.56mm round, a small bullet travelling extremely fast.

S-7-170 specifies a firearm that has a semiautomatic action, can fire 7 shots or more without reloading, and fires a cartridge having more than 170 foot pounds of muzzle energy. The semiautomatic part needs no explanation, but here’s the reasoning behind the 7-170.

There are semiautomatic hunting rifles that have internal (non-removable) magazines that hold five or six cartridges. After firing those, the hunter has to push cartridges one by one into the rifle from the top. That takes time. It wouldn’t be the weapon of choice for a mass shooter, or even your average criminal. If even these semiautomatic firearms were severely restricted there would be resistance from the hunting community, which otherwise might be willing to put up with a law aimed at high capacity firearms.

There is a small cartridge commonly used for target shooting called a 22 rimfire. It comes in “short”, “long”, and “long rifle.” It could be deadly if used with absolute precision, but again, it wouldn’t be the cartridge of choice for someone bent on mayhem. It is the lowest powered cartridge on the market, with the highest powered version I have seen having 168 foot pounds of muzzle energy. (By comparison, a 5.56 round from an AR-15 has a muzzle energy of 1200-1600 ft. lb.) Again, there would be a geometric increase in resistance to legislation, and some effective talking points against it, if the 22 rimfire was scooped up in restrictions.

So we’ve defined a type of firearm that includes high powered semiautomatic handguns and rifles with high capacity magazines. Now what do we do about it?

We do essentially what the Canadians do. You can own a semiautomatic firearm in Canada, but you need to undergo the moral equivalent of a colonoscopy to do so.

First, you need to take a certified firearms safety course. This is offered by various government agencies and private organizations throughout Canada. We could offer the same courses through state fish and game departments that already offer hunter safety courses, and through local hunting and shooting clubs.

Second, you have to pass a test of your firearms safety knowledge.

Third, having passed the test, you have to apply for a Possession and Acquisition License. This involves filling out an application form and getting an extensive background check. Any history of violence disqualifies you. There are some interesting features to the Canadian PAL application.

You have to list your present spouse or domestic partner, and that partner has to sign the form. If your spouse/partner doesn’t sign the form, the Chief Firearms Officer of your province will notify that person. You also have to list any former spouse/partner you had in the past two years. Again, they will be notified if you don’t have their signature.

You have to have someone provide a signature on the photograph you submit and verify that it is actually you.

You need to provide two personal references (with address and phone number) other than a spouse or domestic partner. They each have to sign off on this statement:

“I declare that I have known the applicant for three (3) years or more. I have read the information supplied by the applicant on this application. To the best of my knowledge and belief, I find it to be accurate and I know of no reason why, in the interest of safety of the applicant or any other person, the applicant should not be given a license to possess and acquire firearms.” Just above that statement is the note, “If you have any safety concerns about this application, please call 1 800 731-4000.” The same sentence appears above the signature lines for the current and former domestic partners. This is useful for avoiding that awkward situation when a somewhat scary acquaintance asks you to sign for them.

I seriously doubt that Nikolas Cruz (Parkland), Laughner (Giffords), and Holmes (Aurora) would have been able to pass this barrier, just to name three. Face it, if you can’t find two people on the whole planet who will say “He’s sane,” then you shouldn’t own a sharp fork, much less a firearm.

The PAL can be renewed online every five years. There is a 45 day processing period for an initial PAL application and then a 28 day waiting period before the first purchase.

Restricted Firearms need to be registered to an individual and that registration needs to be updated when a firearm is transferred to another person by sale, barter, or gift. They can only be transferred to another person with a Restricted PAL.

Another Canadian requirement for Restricted Firearms is that they be stored unloaded in a locked container. (Unrestricted firearms need at least a trigger or action lock.)

All together, these requirements would put a serious damper on sales of S-7-170 firearms. They would make it a lot harder for straw-man purchasers to operate and would discourage the casual “why not?” purchaser. Mentally unstable or habitually violent people would be at least seriously hindered and most likely stopped. At the same time, responsible, law abiding individuals with the intellect and patience to make it through the class/test/application/waiting period (and spouses and friends who respect them) would be able to purchase and possess such a firearm. Second Amendment misinterpreters (that’s another argument) can relax.

The proof of this procedure can be seen in the Canadian crime statistics. Canada has a gun related death rate of 1.97 (per 100,000 people), compared to the U.S. rate of 10.54. It’s also interesting to note that the accidental (gun) death rate in Canada is 0.05, less than a third of our 0.18 rate. Those safety courses, hm? Canada still has 30 guns per 100 people (U.S.: 101), so it’s not as if people can’t get firearms at all.

A Canadian style S-7-170 law would pass constitutional muster even with a conservative Supreme Court. It would address the specifics of firearm lethality in a way that the term “assault rifle” won’t. Backed by universal background check it could save tens of thousands of lives every year.

An afterthought: If you like this idea, you should forward it to your friends, and definitely to your elected representatives. Tweet it, Facebook it, hashtag it #S-7-170.

I Will Let You Eat Cake

I am going to ignore the fresh slice of insanity that greets us every dawn and switch to a slice of hedonism for a moment. I was at a potluck the other night and brought a chocolate cake I had made. It got a good reception and friends asked for the recipe. As you wish.

I got the recipe back in the 1980s when I worked as a prep cook at the Five Spice Café in Burlington VT. It was a place of excellent pan-Asian food and rich desserts. This was called Blackout Cake. It’s not too sweet, but deeply chocolatey.

The base cake is what is called “Wacky Cake,” a cocoa based cake made with no eggs or milk. Here’s the recipe for two 9” diameter layers.

Ingredients

    3 cups flour

    6 heaping tablespoons cocoa powder

    1 teaspoon salt

    1 1/4 cup sugar

    2 teaspoons baking soda

    4 teaspoons vanilla

    2 teaspoons white vinegar

    ¾ cup vegetable oil

    2 cups cold water

Directions

Preheat oven to 350 degrees F.

Place the dry ingredients in a bowl. Make 3 small holes in the mixture. Pour the vanilla in one hole, the vinegar in another and vegetable oil in another. Pour water over the top and mix. Pour into two lightly greased 9 inch cake pans. (Or 2 8”x8” square pans) Bake for 30 to 35 minutes. A toothpick should come out clean. Note: set this toothpick aside – you will need it later.

You will need filling, frosting, and some booze.

At Five Spice the filling was all-fruit raspberry jam. The other night I was low on raspberry and substituted fig preserves. It worked fine. Any sweet jam will do. Maybe apricot next time?

The frosting was just 2/3 semi-sweet chocolate and 1/3 butter, melted and mixed together in a double boiler. (In my case a stainless bowl in a pot of water.) Mix about half of the chocolate in with the butter and melt it. Then take off the heat, let it cool a few minutes, and mix in the rest of the chocolate. This cools it down more and seems to improve the texture.

The booze is flexible. I have used rum in a pinch, but an orange flavored liqueur is best. At the Spice we used Triple-Sec. More recently I used Grand Marnier. Ton choix, mon ami.

So, take your bottom layer, grab a long, sharp knife, and slice off the rounded top of the layer. This gives you a flat surface for the filling and a container of dark chocolate cake slivers for snacking.

Open your bottle of whatever, let’s say Grand Marnier, put your thumb over the top, and spritz a generous dose of boozy moisture into the cake.

Spread the top of the cake with a good eighth inch or more of jam.

Put the second layer on top of the first.

Find your carefully retained toothpick and go at the top of the cake like a meth-addled woodpecker.

Booze time again. Thumb-spritz Grand Marnier all over the top.

Spread your molten buttery chocolate frosting over the entire cake. Place in the refrigerator to chill and solidify.

Pour yourself a couple of fingers of Grand Marnier, because you deserve it.

What you end up with is an extremely dark, not too sweet cake base that reeks of posh liquor. The sweetness comes from the jam interior and the somewhat brittle coating of chocolate. Take a bite, wake up with your heels in the air. Blackout cake; what we need in dark times.

There Will Be Math: Fracked Oil

I saw the following chart in an issue of Peak Oil Review, a publication about the oil industry.

 

Note the numbers on “U.S. light tight oil.” This is what we would call fracked oil, that is, oil from one of the shale deposits in the U.S. What distinguishes these deposits is the difficulty of extracting oil from them. They have low permeability; the gaps in the shale are small and not well connected, so there isn’t much oil per cubic meter and that oil has a tough time moving through the rock. Just for comparison, sandstone oil deposits in Saudi Arabia have a permeability of about 5 Darcies. (A Darcy being an oil industry specific unit of permeability and perhaps 19^th century English hunkiness) An American shale deposit might have a permeability of 5 milliDarcies, one-thousandth as much.

The answers to these problems are horizontal drilling (“bottle brush” wells) and hydrofracturing, the injection of high pressure fluid to crack open the shale. These are expensive processes.

Note that in the chart the capital costs are per peak daily barrel, not the average. Because of the nature of a fracked well, the output tends to be extremely high at first, but tapering off quickly. A fracked well might produce most of its total output in the first few years of production. In contrast, a conventional oil field in the Middle East might slowly develop to peak production and last decades. Note the relatively low capital and production costs for Iraq and Saudi Arabia.

Elsewhere, on an investment site called Seeking Alpha I found a graph of projected and actual production from a particular well drilled in the Bakken shale formation in eastern Montana and western North Dakota.

 

Looking at these numbers it strikes me that the pessimism I hear about the economic viability of these shale formations is well founded. I’ll apply the numbers from one to the other to get a general idea of the economics. Right now crude oil is around $57/barrel. Subtract the $8/barrel for production costs and the oil producer will have $49/bbl to work with.

The well in question peaks at about 475 barrels per day. By the EIA chart, a 475 bpd well costs between $28 million and $42.75 million to drill. The average over six years is about 1/3 of peak, so drilling costs $180,000 to $270,000 per average daily production.

At $49/bbl, $180k/$49 = 3673 days to breakeven, or about 10 years. The higher number, $270k, gives a breakeven point of 15 years. Add interest payments to that.

Right now those millions are coming in the form of junk bonds and venture capital. The bonds pay around 5-7% interest. The investors want higher returns, but I’ll be optimistic and assume 5%. At the low end that starts off with interest payments of $1.4 million/year, which is $3835/day or 78 barrels breakeven at $49/bbl.

Eyeballing at the production graph, the first 3 years average 150 bpd so the well makes $2.68 million/year, netting about $1.3 million/year. Problem: If the loan period is ten years, then annual interest and principal would total $3.64 million. This well could make that in the first year, but not the second.

Note that the producers re-fracked the well when it dropped below 100 bbl/day. Re-fracking costs about $2 million and brings it back to 100-200 bbl/day range for a couple of years. With an average over the next few years of a bit over 100 bbl/day, this adds a year to the breakeven point.

At the end of six years the flow has dropped to around 50 bbl/day. Even if the production company had somehow been making full payments all along, this is still something close to the breakeven point for just paying the interest (~$890k). There are at least five more years to go before the well makes back its initial investment.

This is all generalities, averages, and back-of-the-envelope, but even with a more optimistic scenario it doesn’t look good for the loan officer who approved this one. The operators will struggle to eke out sufficient total production and will probably hit permanently negative cash flow just two years in.

Not all sections of the various shale fields are the same. There is a concentrated area of low cost wells in a few western counties of North Dakota. These wells can make money at $40/barrel. On average, though, shale oil is a losing proposition in the mid-fifties. The average breakeven price is more like $60, and shale oil in the U.S. suffers from price discounts due to inadequate transportation infrastructure. Conoco Phillips, the largest U.S. oil exploration company, has announced that it will not pursue any opportunities with all-in production costs of over $50/barrel. That limits their options.

As recently as the summer of  2014 the WTI oil price was over $100. A combination of U.S. and OPEC overproduction killed the price. U.S. shale oil production went from 1 million barrels/day in 2007 to a peak of just over 5 million in 2015. It has dropped by a million since then, but OPEC is holding back production to keep the price in the $55-$60 range. They can crash the price again if they think wiping out U.S. shale production is in their interests. Then again, if they manage to crank the price over $60 fools will rush in and complete half done shale wells and the overproduction will drop the price again.

Witness the string of bankruptcies in the shale oil and gas sector. There were 89 last year alone. Investment has dropped off and the rate of new wells being drilled is down. Most of the major players are burning at least $500 million annually.

I know you will be shocked, shocked, by this, but it looks as if the shale oil boom was mostly a con from the beginning. It efficiently transferred cash from the pockets of investors, banks, and bondholders into the pockets of drillers and oil service companies. It was less efficient at transferring oil out of the ground for less than the market price.

The 10% Solution

So, recapping from my last post:

Russia interfered with our 2016 election in a big way and deserves some kind of spanking for that.

Russia’s economy and government are vulnerable to variations in the price of oil.

Given that we use so much of the world’s oil, small variations in our demand can make a big difference in the world oil market, and therefore oil prices. If our demand drops significantly the price of oil drops even more significantly, and Russia essentially goes bankrupt.

My first impractical suggestion was that we all slow down on the highway and cut our oil consumption that way. I have an equally improbable, yet technically feasible suggestion about how we could achieve the same goal. I should note up front that I don’t expect this idea to go anywhere while the present administration is in the White House and former Governor Goodhair of Texas runs the Department of Energy. For that matter, until we get the oil companies backed off from Congress a few paces. Here goes.

This proposal has two inextricably interlocked parts: An efficiency and conservation effort and a strike price tax on imported oil.

First, the strike price tax. It’s an odd tax, in that it isn’t a fixed percentage or a fixed fee per unit of taxed stuff. It is a fixed target price. The price of oil in the U.S. (the WTI or West Texas Intermediate) as I write is around $52 per barrel. The international price (Brent) is around $57 per barrel. A strike price tax would establish a target price of, let’s say, $60 per barrel. Right now that would mean a $3 per barrel tax on imported oil. If Brent goes to $56, a $4 tax, and so on. We presently import about 5 million barrels a day (mbpd), so every dollar in tax raises $1.8 billion per year. Such a tax would fix the U.S. domestic price of oil at $60 per barrel as long as we import any significant amount. The jump from $52 to $60 would add about 13 cents to a gallon of gasoline. Not wonderful, not catastrophic. The beauty of this tax is that we could set it at the price of oil at the time of introduction and American consumers would see no price difference at the pump.

Second, start a publicly announced effort to reduce our national oil consumption by 10%. Just 10% to start, but with intimations that if this worked out well we would keep going to 15% or even 20%. This would be financed by the strike price tax on imports. That initial $3 per barrel would get us $5.4 billion annually to start with.

The money would go to all the things you might imagine: sealing and insulating houses, office buildings, and factories (oil heated ones), upgrading heating systems, giving incentives for more efficient building methods, public transportation improvements, incentives for gas mileage improvements in vehicles, infrastructure assistance for states and cities, and so on. Whatever works. 10% wouldn’t really be a stretch, especially when one considers that an average European uses 40% less energy than an average American.

Even before we hit the 10% mark, world oil markets would react. We would be proposing the removal of about 2.5% of world oil demand when a less than 1% glut dropped the price of oil into the $25 - $30 range just over a year ago. I’m sure the Brent price would drop $5 just on the announcement. That’s another $9 billion a year for us to work with.

So what is the fallout from a program like this? Going back to the primary motivation, Russia would be in trouble.

In direct terms, oil and gas production is 16% of Russian GDP. According to a study by the Carnegie Moscow Center, when we calculate the indirect money flows generated by Russian oil and gas, it’s really more like 60-70% of GDP. It accounts for 50-60% of Russian government revenue and over 50% of exports. If the Brent price dropped by half, Russia would suffer an across the board revenue loss of 25%. It would be just punishment with essentially nothing that the Russians could do about it. Vladimir Putin would be busy struggling for political survival and Russian focus would have to turn inward.

The Persian Gulf monarchies would also suffer. Their cost of production is generally below $10 per barrel, so they would still make money. Their princes would have to buy gold *plated* objet d’art instead of solid gold and distribute more to the general population. They also might find it harder to come up with under-the-table protection money for all those jihadists.

Our European allies with diversified economies would enjoy some price relief, as would any non-oil based economies.

Here in the U.S., the price of oil would be high enough to maintain domestic production. Perversely, oil exporting countries would be tempted to increase production to make up for per-barrel losses, exacerbating their problem. The domestic price of oil would also be stable so that individuals, institutions, and businesses could invest in efficiency improvements with the expectation of a return on investment. Maintaining the price of oil would also prevent people from rushing out to buy giant urban assault vehicles.

It would be a massive job creation program. Energy efficiency is labor intensive. It requires individualized site analysis and design, and real people in person doing renovations. The insulation, sealants, large appliances, and construction materials tend to be domestically produced. Investing $10 billion a year into energy efficiency will create far more jobs than dumping the same money into refining and distributing foreign oil.

It would reduce U.S. health care costs. 10% less oil burned means 10% less emissions from oil products. We could see near instantaneous reductions is rates of asthma and long term reductions in lung and heart disease.

So much winning. So much Russian dismay. So much resistance from Exxon-Mobil. Any policy like this is on the other side of a political turnaround. Still, we need to do more than oppose the present stupidity; we need to propose new ideas.