A Bleak Update on Tourmaline Oil Corp. (TOU)

This summer CMR published a report on Tourmaline Oil Corp (TOU). We showed that the company sucked up cash harder than a black hole and becoming economically viable was nigh mathematically impossible.

Their strategy has been nothing more than bigness. They were not building a strong company and making acquisitions with internally generated cash, Instead, they gobbled up the proceeds fed to them by fanciful underwriters to buy assets so they could constantly trumpet record production numbers and drive up the share price. While Tourmaline’s C-suite speculators kept devouring funds with their capex and M&A binge, they were striving for a Hail Mary liquidity event when some bigger E&P company would hopefully buy them at a nice valuation.

The company just released its Q3 results and has only provided further support to this thesis. Tourmaline is still spending too much money with little to show for it. CMR analyst Daniel Plainview provides us with an update.

Tourmaline Oil Corp.; Q3 Update

A follow up from the quill of Daniel Plainview, Esq.

It has been a number of months since I took to this forum to share with the fine readers the patent market absurdity that is Tourmaline Oil.  While its shares have fallen since the summer (about 30%) this is by no means out of line with the declines of other Canadian oil gas companies.

Recently another quarter of financial results was announced, so perhaps it is a good time to see if this company has finally made a dollar.

tourmaline update


(Also note that we have updated the chart to now include proceeds from asset sales; technically a positive cash flow item, as asset acquisitions would be negative. Not that it matters much.)

In the six months of new financial data we can see that Tourmaline continues to outspend what it takes in, in an effort to grow production (to lead to more of the same?)

Cash flow from operations were together another C$ 412 million, but spending (net of $0 new asset sales) was C$ 719 million.  Free cash flow was therefore -C$ 307 million for the last 6 months, bringing the grand total money pit to ~C$4.35 billion since 2009.

A positive development might be that it appear the company is now aware that they cannot promulgate cash flow and earning figures without the accompanying capital expenditures that drive the production.  In their October 14th press release they have budgeted free cash flow projections for 2016 and 2017.  In a low gas price scenario they free cash flow will be ~C$45 million followed by ~C$167 million, and in a high gas price scenario free cash flow will be ~C$103 million and ~C$414 million.

So hypothetically, at the high price scenario, investors might see positive cumulative free cash flow some time in the 2020s, but I won’t hold my breath.

Also worth noting is that the low gas price scenario assumes a median C$3.25/mcf price for Alberta natural gas.  Presently it sits at ~$2.40/GJ (or ~$2.53/mcf); so they only need their base commodity price to go up 28% too.

This is a company that grows production at any cost and has never had an economic business model.  It requires constant issuance of new shares and cannot maintain growth on a per share basis if valuations drop.  It is a house of cards waiting to fall.

It’s enough to make Tourmaline shareholders sweat.

Anyone Who Hates Fossil Fuels Is Anti-Human

aaa1Sources: Boden, Marland, Andres (2010); Bolt and van Zanden (2013); World Bank, World Development Indicators (WDI) Online Data, April 2014

Market Lemmings Case Study: Tourmaline Oil Corp.

The fall in oil prices is starting to expose some of the waste in the energy sector, but this central bank fueled bubble is still rife with clusters of error.

The ‘boom’ phase of the business cycle — more accurately described as the malinvestment phase — is where a lot of things just stop making sense. People will shovel money into wasteful investments based on distorted credit conditions and hyped up expectations.

Today our case study is Tourmaline Oil Corp., a favorite in the independent energy growth company category. With a 52-week high of $58.73, the consensus analyst rating is “buy” while presently trading around $39 at 18x earnings. It recently issued $168 million in new shares (at $39.50/share).

CMR analyst Daniel Plainview shows why Tourmaline is an economic black hole relying on the “greater fool.” Regardless of whatever distortions manifest in the stock market, Tourmaline is its present form is a zombie company — not an investment, but just one of many ways to gamble in the stock market casino.

A Question for Tourmaline Oil Corp.: How Do You Make Money?

By Daniel Plainview

When trying to determine the proper price of a stock the conventional rule of thumb is to predict the amount of money that stock is going to make each year over the long term, and then discount those earnings to the present at an appropriate rate for the risk you are taking.

The inverse of this, but it is in essence the exact same methodology, is to use a Price to Earnings ratio to evaluate a stock. The higher the ratio, the more expensive the stock; the lower the ratio, the more likely you are getting a good deal, so long as the future earnings hold up.

But what if the stock you are looking at is in an industry that typically doesn’t make any money?  I’m referring to industries where the company earnings are often affected, to a large degree, by depletion expenses.

Depletion is a non-cash charge and it can ensure that a company generates plenty of cash flow but renders the conventional Price to Earnings analysis moot. Industries with high DD&A (Depletion, Depreciation & Amortization) are generally involved in resource extraction.

Because earnings are essentially meaningless for a lot of resource companies (not to mention the other accounting tricks that can affect earnings) it’s always a good idea to look at a company’s cash flows.  There are three types of cash flows:

  1. Cash flows from operations
  2. Cash flows from investing
  3. Cash flow from financing

While in any given period the cash flows in any of these buckets can be either positive or negative, over the medium to longer term (2+ years) one invariably wants to see that cash flow from operations is positive, cash flows from investing is slightly negative, and cash flows from financing is also negative; with the change in cash position from period to period being immaterial.

What a positive/negative/negative cash flow segmentation is indicative of is 1) the company is making money, 2) that it is reinvesting in the business to grow the business, and 3) it is able to return capital to the shareholder, or at least doesn’t steadily require new financing to fund its investments.

It is with this in mind that we now consider the Canadian oil and gas industry.

Recently the commodity prices that drive the cash flow from operations that Exploration and Production (E&P) companies generate took a tumble.  Both oil and gas prices fell by ~50% from their levels in the first half of 2014.

By itself a single year of lousy prices shouldn’t erode as much value in the markets as what occurred, but what changed is the market is now more pessimistic about prices for all future periods too.

Companies have responded by scaling back their investing, and cutting capital expenditures for the drilling of new wells and building of new facilities.

Generally speaking, oil and gas companies always have to be spending some money on new production in order to maintain overall production levels.  Well performance declines over time, and by how much depends a lot on the geology of the particular “play”.

A really good well might only decline at ~20% per year, but it still declines.  Newer unconventional extraction methods (drilling horizontal multi-stage frac wells into shales) can come down a lot faster: ~50% per year.

So ultimately the goal of any oil and gas company, in any environment, is to have enough cash flow from operations that it can pay for all the cash flow from investing (capital expenditures needed to keep production up), and still have enough left over to pay the shareholder.

Enter Tourmaline Oil: the oil company that has 85% of their production coming from natural gas.  Etymology aside, there are more serious issues with this company’s business model.

In their last earnings announcement in March, they happily proclaimed their 76% growth in cash flow. Sounds good… but wait! There is a footnote: “Cash flow is defined as cash provided by operations before changes in non-cash operating working capital.” So what about capital expenditures?

Here is a chart of Tourmaline’s cash flows, going back to 2009:


The cash flow from operations is in green, and the company’s capital expenditures (only a sub-set of cash flow from investing) are in red.  The black line represents the cumulative amount of cash flow from operations minus capital expenditures (or Free Cash Flow) up to each period.

What this shows is that Tourmaline has spent almost $4.7 billion more on drilling holes in the ground, than it has made from the hydrocarbons those holes have produced, since 2009.  Furthermore, over 25 quarters of results, they have never made more money than they spent: Free Cash Flow has never been positive.

In the company’s defense, they have grown production at an industry-leading rate.  But it really looks like they’re spending a dollar to make fifty cents, and making up for it on volume.

It has gotten to the point where if the company stopped spending money, but continued to earn cash flow from operations (and let us assume the same prices and only a 20% production annual decline), they could not make that money back.  In actuality Tourmaline’s wells probably decline a lot harder than 20%, but the story is bad enough as it is.

These harsh realities force us to ask the question: where did the company get $4.7 billion?  The answer is that they got it from new investors who bought shares in secondary offerings, and some money from raising debt.  It looks as though this external funding process will have to continue ad infinitum; another secondary offering being announced just recently for $168 million.

And investors should keep this in mind: the only reason Tourmaline is able to grow production on a per share basis is because the shares have a decent valuation, but the only reason the shares manage to eke out a decent valuation is because they are able to grow production on a per share basis.  If the shares were to fall enough in price, the amount of dilution created by external financing would make it impossible for the company to grow.

And the last point to make about the company: the management team in prior iterations at Berkeley and at Duvernay were able to successfully build up and then sell the company to a bigger fish.  Duvernay in particular made a lot of people a lot of money as it was sold at the height of the commodity boom in 2008 and Shell paid an unmatched valuation in the transaction (~27x EBITDA).

In fact, the only way Tourmaline’s business model makes any sense is with an M&A exit strategy: ramp up production at any price, and find a sucker to buy it just before the house of cards collapses.

But if investors are assuming Tourmaline will be similarly sold I would only point out that Tourmaline is now worth about $9.2 billion and is the 8th largest E&P company by market capitalization in Canada.  It’s getting to be too big for others to swallow, and suckers like Shell might be hard to find this time around.

Then again, they did just find another 4.25 million suckers…

(Click here for supporting calculations.)

Chinese Slowdown Puts a Drag on Energy Markets

Oil is the world’s most important commodity. Its market provides a good indication of where the economy is going.

The price of oil fell for five days before jumping today because of strong consumer confidence numbers in the US. The push down had been largely due to news from China.

Chinese manufacturing activity fell in May after months of slower growth. Its PMI hit a seven-month low of 49.6. A value below 50 indicates a contraction.

Oil consumption in OECD countries has fallen the last few years. In the rest of the world, it is has grown. The biggest of these consumers is China.

China is the world’s major exporter of manufactured goods. The decline in manufacturing activity implies the world’s slowing demand. This in turn will result in a reduced demand for energy.

China is a major factor in the marginal demand for oil. The oil price is not set by speculators, but supply and demand. Producers pump as much as they can. Chinese demand — in no small part driven by radical monetary expansion — is largely responsible for the boom in oil prices, from $20 a barrel in 2001 to current levels.

Chinese slowdown will cause oil prices to fall. When the economy is growing, oil prices rise because there is greater demand for energy. Prices fall when demand falls. This is elementary economics. The price of oil will decline.

— Read more at Marketwatch

European Union Wants to Tax Heavy Crude from Oil Sands

The European Union is falling apart. It is desperate for money. The bureaucrats in Brussels will tax anything they can.

Now the EU wants to modify its fuel quality directives, so that refiners who use oil that is “too dirty” (according to bureaucrats) must pay a tax.

Joe Oliver, the Natural Resource Minister of Canada, thinks this amounts to specifically targeted tax on Canadian oil-sands product. He says Canada will sue the EU at the World Trade Organization if they implement the changes, because the oil-sands crude isn’t any “dirtier” than many other crude imports which are not subject to the tax.

Firstly, let me note the hypocrisy when an official from Harper’s government whines about tariffs, while Harper’s government loves tariffs. “Oh yeah, taxing our stuff is bad; taxing your stuff is okay.” Typical government knavery.

On a more general level, yes the EU fuel quality directives and its associated penalties are bad for the economy. They are bad for Europe and bad for Canada. They reduce production of the taxed good and divert resources to government approved fuels. The government is in principle incapable of knowing to what extent a given quality of oil should be used.

Oil sands production is “dirty”, sure. The industry has a lot of flaws. Really, the CO2 emissions aren’t even a big deal, although that’s what everyone focuses on. But the environmental situation is still very screwed up, because Alberta is essentially a mini-petro-state. Property rights and laws of tort can rarely protect the environment because virtually all the pollution takes place on government land.

Even so, that is true of most oil. There is very little “clean” oil where you just turn on the tap and get light, sweet, succulent crude with minimal impact on the earth. Most of it is heavy and sour and difficult to get. Due to inept government regulation and interference with property rights, its production is environmentally problematic. So the European tax seems to be not just destructive, but arbitrary.

If the WTO agrees with Canada that the fuel directives constitutes an unjustified tax, they can’t force them to change it. It just means the Canadian government can put their own tariffs up to retaliate. That is bad for everyone. It would be better to just accept one dumb tax over which one has no controlnthan implement another dumb tax to go along with it. If the Canadian oil producer finds it harder to sell its oil, that’s already bad enough. Why should the Canadian consumer also be punished? It makes no sense, and only a politician or a shyster would advocate this.

Read more at Market Wire

TSX Loses All Gains for 2013

The Canadian stock market was hit pretty hard as oil fell and gold got hammered. At the close, gold was down nearly $75 USD. The TSX lost all of its 2013 gains over the last few days.

I have predicted that North America will face recession this year, so a falling TSX is consistent with that. An economic correction is especially hard on capital goods industries and raw materials.

I also believe it is a reasonable expectation for gold to fall to $1200-$1300/oz as the economic error cycle matures. Then, when a panic hits, and Fed and other central banks will respond with further inflation, and the gold price will rise in response to that.

A commodity broker says: “the argument for gold as a safe haven or protection against inflation just isn’t there . . . It doesn’t look too good for gold.” This assumes there another crisis will not occur, and central banks will not inflate in response. At some point central banks will have to stop inflating to prevent currency collapse and preserve their nations’ banks, yes. Yet, I do not think that time is nigh because we have not yet seen massive consumer price inflation result from the monetary expansion since the ’08 financial crisis.

Read more at Financial Post.

Ron Paul in Calgary

Last Friday, I attended the Ron Paul speech at the “Making Alberta Safe for Capitalism” summit.  This was at the Westin Ballroom in downtown Calgary. I was among approximately 300 attendees, which included financial professionals, publishers, IT nerds, engineers, students, neocons, and more.

I would like to note how this attracted virtually NO media attention. I do not think there is any “conspiracy” here — rather, it is simply due to Ralph Klein’s memorial service being held at the same time. We all know how the media loves to fill its time with the glorification dead politicians whenever the opportunity presents itself. This week, they’ve got Thatcher.

Besides, Ron Paul’s ideas make Canadians uncomfortable. Most people don’t want to talk about such things.

Ron Paul’s speech was basically what you would expect if you’ve been following him for the last few years. I’ve been watching Ron Paul’s political career since 1998, so I was very familiar with all the themes: personal responsibility, free markets, small government, anti-war, and anti-central banking. Still, it was great to pay respects to someone who is more than just an honorable statesman (a contradiction in terms when applied to anyone else), but a man whose efforts have done more for the liberty movement than anyone else in the modern era.

Having retired from politics, this was Ron Paul without any filter that might have previously been imposed by the realities of being in political office. Yet since his message has always been fundamentally radical, there was no difference with post-politics Ron Paul. The message is just as unfavorable to economic, social, and imperial intervention as ever.

At various points throughout the speech, I would look around to gauge the response to certain statements. How delightful to see various attending neocons squirm uneasily when Paul declared there should be no income tax. Some folks scowled at the suggestion to replace government welfare entirely with private charity. Otherwise, the ideas of less spending, less tax, less regulation, and more civil liberties were received favorably. Paul age and manner makes is a kind, wise grandfatherly figure — part of his great success is due to his ability to convey radical arguments in favor of liberty while making them seem completely non-controversial.

The biggest opportunity that was missed in Dr Paul’s speech was HEALTHCARE. If there is a sacred cow in Canadian politics, it’s definitely government healthcare. Without a doubt, government healthcare is a disaster, and Canadians need to learn why it will always be awful regardless of the huge piles of money thrown at it. Unfortunately, healthcare was not covered at all in Dr Paul’s remarks. Too bad. Huge missed opportunity, I think.

He is a medical doctor and an economist who can speak with authority on the failings of public healthcare. He is also old enough to speak about American healthcare system before the government became heavily involved. Before Medicaid, Medicare, the HMO Act of ’73, and so on, there was relatively little government intervention with the provision of healthcare. Basic medical services were cheap and plentiful, and a greater portion of the population had health insurance compared with now. The audience would have greatly benefited from hearing his insights on this subject. He has effectively explained the necessity of free markets in medical care — it is a message Canadians desperately need to hear from somewhere. Virtually no one will touch the issue of public healthcare in this country. We will all be worse off as long as this condition persists.

I would have also liked to hear more war-related remarks. Essentially, anything that applies to the US wasting lives and money on Afghanistan applies to Canada as well. Paul spoke about Iraq more than Afghanistan — which is fine in and of itself, but Canada was not seriously involved in Iraq. Our participation in Afghanistan is another story. Sadly, Afghanistan is an issue that people barely seem to care much about. If they do, it’s because they are dumb enough to think we have Canadian forces there “fighting for our freedom.” Yuck. The lack of interest is even more critical now, because Obama has declared he is “bringing the troops home” in 2014. This is typical government strategy: declare “victory!” and suddenly no one cares anymore. Just like Iraq, where there was never any “victory”, and as I write this the country continues tearing itself apart.

Ron Paul’s speech included a few “fanservice” parts for the Calgarian audience:

He said, “Ralph Klein sounds like a guy I might have liked.” Fair enough, given the memorial was that day, and Klein actually did cut spending at one point.  So that’s cool, whether or not Klein was a principled friend of liberty.

He also gave his support to the Keystone XL — with the important qualification that one can get the permission of property owners, the government should not stand in the way of pipeline construction. This is an rather critical proviso, because in reality pipeline construction does involve government takings/expropriations. Remember: in Canada, the Crown owns all the land as a matter of law.

Anyone who attended this event specifically for Ron Paul could be described as “cutting-edge.” Canadians are not generally ready for the radical Paulian message. For many Americans, there is the emotional connection to ideas of independence, revolution and decentralization, even these are not embraced in practice. The Paulian message can get its hooks in that. For Canadians, the state is endlessly glorified in subtle and not-so-subtle ways. There is no element within our culture that reinforces skepticism about state power. The closest thing to this is Albertans’ memories of the NEP, but that is a regional sentiment and it is being gradually overwhelmed with the pleas for more government.

I hope that the mere fact that Ron Paul has visited Canada to give pro-capitalism speeches indicates that there is a growing audience for the message of liberty in this country. Just as the 20th century demonstrated communism was a lie, the 21st century will show us that democracy is a lie. Democracy’s death throes will be earth-shattering. Liberty’s natural elite must spread and shine the light through dark times, so that a better age may yet emerge.

A Lesson from Poseidon Concepts: It’s a Jungle Out There

So I’ve talked to a several people now who were burned bad by Poseidon Concepts (symbol: PSN).

Check out the chart:

psn chart


I used to own shares in this company, as part of a sub-portfolio of above-average dividend-paying stocks. I sold them September last year, because I anticipated a serious lack of growth from their competition being too intense. The dividend just wasn’t interesting enough to care.

When shares started tanking in November, a concerned friend asked me, “Do you still own PSN?”

“No,” I said.

“That’s good!” he told me, then he showed me the chart. I laughed. I made some small gains and got a dividend out of that. I got out at the right time based mostly on intuition.

And that was before the big reveal — Poseidon had to to write-down $100 million of non-existent revenue from 2012. Trading was halted on Feb 15 and the stock price is $0.27.

I have spoken with some sources close to this fiasco. The most interesting thing I heard was that their Controller was really some sort of “fitness model,” as if that was the source of the problem. This seems like a random frivolous remark. But then again, her Facebook page lends a bit of credence to the idea. And it seems weirdly credible when you consider what happened. I mean, really: $96-$102 million in revenue should not have been recorded as revenue? Out of $148 million… over three quarters? How the heck does that even happen? In any case, somewhere along the way their former CFO Matt MacKenzie committed an epic fail. Someone was either dishonest or incompetent.

Overall, whether it is due to incompetence or fraud, this is a huge scandal. There is now a $700 million lawsuit against National Bank for its sloppy underwriting. Lawyers are lining up to investigate possible fraud. What is the lesson to be learned? Picking stocks is hard and you will often lose. Most people will mostly lose. Forget about the art of financial modeling and valuing companies. Most people have no idea what is really going on at any given company. There might be idiots in charge. There might even be fraud. Think Bre-X. Think Enron. Think PFG.

Think Poseidon.

If even the analysts and even the bank underwriting the company’s stock are clueless, how can you trust anyone?

The answer is: Don’t trust anyone. I like to speculate in high risk stocks, and I have a golden rule: “I am financially and psychologically prepared for any stock I own to fall to $0.” I sleep well at night.

Inside the Mind of a Bureaucrat from the National Energy Board

The search function in email these days is pretty good. Most of one’s slack in email organization can be carried by the search tool.

Sometimes your email searches can pull up really OLD stuff along with whatever you were trying to find. Like an interesting exchange with a bureaucrat from the National Energy Board. Fun!

The exchange occurred on Facebook in 2010. It began when I said something to the effect of, “Bureaucrats are bad forecasters; almost no one cares about their predictions; and the NEB should be abolished.” That might have been considered rude, because I said it to a NEB bureaucrat with whom I went to high school! We exchanged a few arguments, and the bureaucrat was clearly outmatched, seeing his economic ignorance exposed at every turn. He ragequit the debate, then deleted the corresponding page to preserve whatever remained of his crumbling credibility.

Because the page was deleted, I cannot get Facebook screenshots or links. I can, however, take screenshots of email notifications I received from Facebook on the subject. These notifications contain the NEB bureaucrat’s replies in full. Unfortunately, this means we cannot produce my replies, which were pretty good from what I can remember. We can infer some details about my replies from the bureaucrat’s own comments.

So what I will proceed to do is use some of the bureaucrat’s quotes to reveal why his creed is comprised of pure economic ignorance. In doing so, I am sure I will rely on the same arguments I used before, but I am mainly going to provide commentary rather than systematic arguments. Most of what the bureaucrat says is so absurd it refutes itself. We will see how bureaucrats must rationalize their pernicious role in the economy. We will also be frightened by the reality that faulty economics guides government regulation. I will be courteous and take steps to conceal the bureaucrat’s identity.


Oh wow. First of all, it is a joke to say that the NEB is an “independent regulator”. Although it is not admittedly clear what that even means. The NEB was created by the government of Canada to function as a cartelization device. There isn’t even a question.

Once upon a time, Western Canada’s independent oil producers wanted to build a pipeline to the East. Big international oil producers, who had far more political clout, preferred an arrangement whereby the east imported oil to be refined in Montreal, and Alberta oil would be exported to the US. How could this ever be settled?

The government did the only thing that could be done — it set up a commission, which later went on to create the NEB.

The conclusion regarding the pipeline was determined in advance. Therefore, the Royal Commission on Energy was stacked with people favorable to those who wanted to create political advantages for some of their friends — including the chief of the commission, Henry Borden. He was head of a utility company who had agreeably helped the government run various different wartime central planning boards during WW2. Other members of the commission were knaves such as George Edwin Britnell, another central planner who’d honed his price setting abilities at the Wartime Prices and Trade Board, and Robert D Howland, a longtime bureaucrat who was fundamentally dedicated to government intervention. The most influential witness heard by the Commission wasn’t even a Canadian guy. It was Walter J Levey, a consultant from Wall Street who represented international oil businesses. This guy too loved central planning. He was head of the petroleum division of the Marshall Plan!

The NEB was never “independent”. It’s been purely political from Day 1. Central planning has always been its purpose. Any “independence” is a fantasy.

The NEB extracts “fees” from the industry it regulates. If these are involuntary, they are taxes. If they are voluntary, that too is worrisome because it conflicts with the idea of an impartial regulator. Not only that, but the agency doesn’t take enough from the energy industry to cover all its costs anyway, so yes, the taxpayer at large is fundamentally on the hook for this “independent” agency.

Note how the comment reveals how the bureaucrat is unsure of the value of the NEB’s market forecasts. He assumes it must be useful and important because the local Calgary news reported about it. Local Calgary news does not report — it parrots government pabulum and offers wildly inaccurate weather predictions. They are desperate for stories, and will therefore cover meaningless reports issued by government agencies that no one cares about. And believe me, the viewers don’t care — if they are the type of people who get their energy market predictions from the local news, then they don’t really care about energy market predictions. “Hi, futures broker? Please sell the March oil contract at market — because of what I saw on Calgary local news!” Nothing like that has never happened in the history of human existence.

Now things start to get really exciting. A friend of the bureaucrat joins the discussion. She breathlessly demands how anyone could think the NEB should be abolished.


On the issue of safety, we must point out that everything could be done more safely than it is currently done. All safety decisions at the margin. The question is, who decides what is the “right” amount of safety?

There are only two options: the market can freely decide, or government can impose a safety standard. In the market, the price for “less safe” work will be bid up relative to “more safe” work. Hence the concept of “danger pay”. That’s why all Canadian lumberjacks have so much money. Tort law and contract law can deal with situations in which market chosen safety rules are violated.

Conversely, governments determine safety standards through political decision-making. They are imposed on firms with the power of guns and badges. Often, safety standards are determined by captured regulators. The largest, most powerful firms lobby for expensive safety standards that impair their smaller competitors. Furthermore, imposing standards reduces innovation, because resources will be shifted away from non-standard safety measures.

And who would check “essentially monopolistic” tendencies of pipelines? Who indeed? The market would normally do this. Monopolies only arise where competition is restricted by law. It is not a monopoly if I am the only guy with a pipeline in some area, so long as there is free entry to compete with my pipeline. But instead, the NEB exists to restrict competition, as one can see from its formation and continued operations. It doesn’t “check” the monopolies, but rather enforces them. The bureaucrat says so in his next comment. So it is foolish to say that without the agency which establishes the “essentially monopolistic” tendencies of the industry in question, no one would check these supposed tendencies.

We get to explore this further with the bureaucrat’s next comment:


First, I am always amused by how it is me, saying “let the market work,” who is arrogant. The bureaucrats who think they can manage something as complicated as energy markets are not arrogant at all. That’s rather modest. Because it can be done, as written in the regulatory economics textbook.

Who is to say what “duplication of facilities” is unnecessary? The bureaucrats? How do they know? They can’t know. But the market can determine whether a facility should be produced, because it involves people using their property and responding to prices. The bureaucrat’s attitude here smacks of simplistic Marxists who decry capitalism for giving us us too many brands of toilet paper and deodorant. Unnecessary production, they say. Because they know what is necessary? Right, and there is a herd of prancing unicorns that lives in my backyard.

One who grasps economic law comes to the realization that there is no “right” or “wrong” numbers of firms in a field of production. The market is constantly adjusting, and allocates resources accordingly when more competition is needed (rate of return is too high) and when there is less competition needed (rate of return is too low).

The reader should take special notice of how this bureaucrat — who assures us he is a champion of consumer interests — offers an argument that is ridiculously convenient for the monopolies and oligopolies themselves. “Yes, free competition is good, but not in this situation — i.e. the situation in which competition would threaten my own profits, which are determined on a cost-plus basis. It’s a natural monopoly, so competition just can’t be allowed!” Anyone intelligent can see what is going on here — unless they have a degree in Economics.

The bureaucrat needs to have it pointed out that there are no “natural monopolies”. There are only monopolies and monopolistic privileges created by restriction of competition. And this only arises through government interference. It is not a monopolistic advantage for one firm to be bigger than another. He cites TransCanada, which supposedly couldn’t benefit from its monopolistic privileges (provided by government) because it was regulated (by the government). What a mess. Without restrictions to competition, it would have literally been impossible for TransCanada to do what the NEB claims it prevented. The pipeline business overall would have been much stronger.

This follows the classic pattern of intervention. Government intervention introduces a problem (monopoly prices). People complain about it. The government does not eliminate its previous intervention, but instead responds with more intervention (regulation of prices) to “solve” the problem it created.

This is just like how we are supposed to believe governments and central banks do great jobs regulating their financial systems. Like the US government and the Fed must be real heroes, regulating the economy and looking out for the national interest rather than some other interest. Because that’s what it says in the Introductory Macroeconomics textbook.

And “cost of service”. Yuck. That’s just the best way to regulate, he says. Dear God. Are we going 150 years backwards in economic science here? To say that anything, anything at all, should be priced because of what it “costs” is to deny the subjective theory of value as applied to economic goods. Prices determine costs — not the other way around! We’ve known this since the 1870s. That’s what the Marginalist Revolution was. Yet bureaucrats prefer unscientific nonsense if it will justify their existence.


Oh no. He did not bring up Chicago. Yes, he did! Well this is the end for Mr Bureaucrat. He is absolutely clueless.

Before regulation replaced market competition in Chicago, there were FORTY-FIVE electric light companies. Gas prices had fallen 50 percent. The Chicago “entrepreneur” referred to by the NEB bureaucrat did not like all the competition. Instead of fighting it out in the marketplace, he lobbied local and state regulators to grant him monopoly privileges. Like our bureaucrat friend says, the Chicago utility owner wanted to reduce his risk. He wanted to protect his profits. He didn’t want competition raining on his parade. Great for him and his company. Great for bureaucrats with all their new regulatory jobs. Bad for everyone else!

Oh, but one might say: “If there is too much competition it will be impossible to get ‘fair’ return!” Apparently the bureaucrats and those benefiting from the monopoly know what a ‘fair’ return is, but a firm that wishes to risk its capital by competing in a “natural” monopoly doesn’t? Give me a break.

A quick tangent: The fascist reference is pretty hilarious. The guy who opposed to monopolies propped up by state regulators is the fascist. Not the bureaucrat who wants to run the economy his way. Not the firms who capture regulators to preserve their monopolistic advantages.

He finds it incredulous that I could regard the consensus about utility regulation to be totally wrong. All the countries do it like this, so they must be right, and I must be wrong! Again, there is no reason to think that just because it is currently done one way, that way must be good. Again, look at the world financial system. We are in the midst of a global economic catastrophe because that consensus is horribly, profoundly wrong. Mainstream economics, the very stuff the NEB bureaucrat is depending on, has totally failed us. Even Mervyn King said the financial system is a joke, regardless (or because of) of how closely it follows the textbook prescription.

If it’s true in the case of financial regulation, why not in the case of utility regulation? We can apply the same economic principles to public utilities as those we use to determine the financial system is bad, and we are inexorably bound to come to an anti-interventionist position on the issue. What is so inconceivable about thinking mainstream economics has monopoly theory completely screwed up, with its bogus, fantastic models of perfect competition held up as the standard to compare real economic activity?

I’m not sure why he cared about my job so much. Maybe because he was trying to network his way out of the soul-sucking bureaucracy, despite his claims of how awesome the NEB is. Or perhaps he wanted to put me in some category of people with allegedly less credibility than him, as if that were possible. My cat knows more about economics than this guy. If I remember correctly, I told him I worked at McDonalds and was an expert at making Big Mac Combos, so that it would be even more embarrassing for him to be out-matched on an economic debate.

There were a few other less substantive comments exchanged after this, but the damage had been done. The NEB bureaucrat deleted the page with this discussion and then drowned in an ocean of tears.

From Libya to Uganda! The battle for Africa’s resources.

The resource rush is on for Africa. China was ahead of the American Empire in Libya, and look what happened there (even though Obama was buddies with him two years ago).  China’s commercial deals with Libya are toast. The next imperialist target in Africa is clearly Uganda. Pepe Escobar writes:


That brings us to Uganda as a new land of opportunity. Ah, the sheer scale of humanitarian warmongering possibilities. For a semblance of success, the initial steps of Obama’s African surge would have to include a military base with a long runway attached, and a mini-Guantanamo to imprison the “terrorists”. If that sounds too good to be true, that’s because it is; think of the Pentagon’s Africom headquarters soon entertaining the possibility of time-traveling from Stuttgart, Germany, to somewhere in Uganda.
Any student of realpolitik knows the US doesn’t do “humanitarian” interventions per se. Africom’s surge parallels the real name of the game; precious minerals – and mining. Uganda – and nearby eastern Congo – happens to hold fabulous quantities of, among others, diamonds, gold, platinum, copper, cobalt, tin, phosphates, tantalite, magnetite, uranium, iron ore, gypsum, beryllium, bismuth, chromium, lead, lithium, niobium and nickel. Many among these are ultra-precious rare earth – of which China exercises a virtual monopoly.

The mineral rush in Africa is already one of the great resource wars of the 21st century. China is ahead, followed by companies from India, Australia, South Africa and Russia (which, for instance, has set up a fresh gold refinery in Kampala). The West is lagging behind. The name of the game for the US and the Europeans is to pull no punches to undermine China’s myriad commercial deals all across Africa.

Then there’s the inescapable Pipelineistan angle. Uganda may hold “several billion barrels of oil”, according to Heritage Oil’s Paul Atherton, part of a recent, largest-ever on-shore oil discovery in sub-Saharan Africa. That implies the construction of a $1.5 billion, 1,200 kilometer long pipeline to Kampala and the coast of Kenya. Then there’s another pipeline from “liberated” South Sudan. Washington wants to make sure that all this oil will be exclusively available for the US and Europe.


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