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Thoughts On Middle-Eastern New Year

January 5, 2016 on 12:59 am | In Opinion | No Comments

The last few days’ events in the middle east, those that started with the Saudi execution of Shiite cleric Nimr Al-Nimr, the peculiar response and escalation that followed from the reminder of the Gulf states, and lastly the conveniently timed attack on oil terminals in Libya, have forced me to think there is something more at play here.

I will first state that I do not subscribe to the school of conspiracy theories. I categorically refuse to believe in any of them. Yet, I can’t help but tie the dots in this specific case. I do not think this is a conspiracy theory, as much as it is a last ditch, coordinated, effort to try to bolster oil prices.

Some Background

It is no secret that oil prices have been declining over the past year, collapsing from $100-105 at the end of 2014, to $35-40 by the end of 2015. It is also no secret that the majority of oil producing countries, especially in the Gulf region, rely very heavily on oil revenues to finance their budgets and their economies.

This collapse in prices has had a severe impact on the countries of the region, ranging from dipping into savings in the case of the Gulf countries (Kuwait, Qatar, Bahrain, Saudi Arabia, and Oman), dependence on foreign debt to finance its budget in the case of Iraq, to a shrinking economy in the case of Iran (that was already depressed by western sanctions). There are even some who are predicting that, at current levels, countries like Saudi Arabia will have exhausted their savings by 2020 or 2022. I do not think, at least not yet, that things will turn to be so dramatic, but its technically a possibility.

Nimr Al-Nimr

The dissenting Saudi Shiite cleric Nimr Al-Nimr was arrested by Saudi authorities and has been in custody since early 2009. Saudi authorities took their jolly time and didn’t bring him to trial until 2012. Then, again, they took their jolly time and, in a country known for swift trials where the judge has an almost cart-blanche to rule as he pleases, took over two and a half years until he was sentenced. The sentence, quite unsurprisingly, was the death penalty. That was in October 2014. The case was appealed in early 2015, and then went on to the Supreme Religious Court. The sentence was upheld in October 2015. So, it’s been almost three months since the sentence was upheld.

Timing and reaction

The Saudis chose to execute Al-Nimr right after the new year. Granted, Saudi Arabia doesn’t celebrate the Gregorian new year, but the timing is peculiar nonetheless. It was probably intended to get the west off guard, during the holidays season, and hence maybe avoid western pressures to postpone the execution, or even spare Al-Nimr’s life and just keep him incarcerated.

That would have been the end of the story, if it wasn’t for the swift reactions in the region towards the execution. It’s not Iran’s reaction, or the reaction of Shiites in Iraq that was anything unexpected. Where things start to get interesting is the quick, swift reactions by other Gulf states, namely Bahrain and the UAE, in joining the Saudis in cutting their diplomatic relations with Iran.

The official story is that the Saudis cut their diplomatic ties due to the attack that followed the execution on their embassy in Tehran. But the fact that both the Saudis and the Iranians were quick to point that no one was present at the embassy means an evacuation had taken place, and with the full knowledge and cooperation of the Iranian government. The lack of worry by Saudis about any ceased documents also indicates the evacuation wasn’t a hasty one.

It is hard to think the Saudis did not foresee the possibility of an attack on their embassy in the aftermath of the execution, else they wouldn’t have had evacuated beforehand. The Iranian regime could have also protected the embassy premises, had it wanted to do so, or had the Saudis stayed put and asked for protection.

Then, as if Bahrain and the UAE cutting ties wasn’t enough, Sudan joined the party and announced it too was cutting diplomatic ties with Iran. The two countries don’t even share a continent! Sure, the Sudanese regime was most probably bribed into, or threatened with diminishing investments by Saudi Arabia if it did not, cut its ties with Iran. But that’s also a very peculiar choice of escalation by the Saudis.

And then, to top it off, none other than the Islamic State, known for its close financial ties with Saudi Arabia, conveniently chose to attack Libya’s Sidra port, the country’s largest oil terminal, on the same day the Gulf countries and Sudan announced they were cutting their diplomatic ties with Iran. Libya, whose oil production has gone from 1.5 million barrels per day in 2013 down to 400 thousand barrels per day in 2015 relies heavily on the Sidra port to export most of its dwindling oil production.

Coordinated Effort

Again, I categorically reject conspiracy theories. However, I cannot help but wonder whether this whole shebang is a coordinated effort led by Saudi Arabia, to induce some uncertainty in oil markets in an effort to bolster oil prices up after months of continuous declines.

Whether this was coordinated with the Iranian regime is anyone’s guess. Whether the Saudis bet on Iran really escalating or getting the message and playing along is also anyone’s guess.

Market Impact

Historically, whenever there was any tension in the middle east, oil prices tended to move upwards, to reflect uncertainty and worry at whatever events were unfolding in the middle east. However, whereas the Gulf region produced 25% of global daily oil output 25 years ago, OPEC’s entire share of the pie today is about a third of daily global oil output, with the Gulf countries share in the high teens.

Which is why, probably to the disenchantment of Saudi Arabia, market reactions today to this whole debacle was mute, at best. Volatility increased a bit, but that was after a prolonged weekend due to the new year coinciding on a Friday. News of declining stock prices on the year’s opening session in China may also have contributed somewhat to the volatility.

But even without the new year and the stock declines in Shanghai, the market’s reaction was nothing to talk about, and prices were down to previous session levels by lunch time in New York.

Iran, which is only a few weeks away from meeting the requirements for the first round of lifting of international sanctions, has too much at stake to risk being dragged into a serious escalation in the Gulf. At stake are not only sanctions on the export of oil (they have stated several times they are prepared to increase production by 500 thousand barrels per day the day sanctions are lifted, with the possibility of adding another 500 thousand within a few months if market conditions allow for it), and the import of goods, but just as importantly tens of billions of dollars in foreign investment that has been preparing to pour into the country over the past year, as soon as sanctions are lifted.

Then, there is the shale oil boom United States, which rendered it into a much larger oil producer than it was 20 or 25 years ago. Shale Oil production is categorically different from conventional oil in that while it is considerably more expensive per barrel to produce, once the technology to extract it was developed during the heydays of $140 per barrel, it doesn’t require the large capital expenditures nor the extended timeframes conventional oil projects require. Then, there is the fact that this shale boom happened in the US, the largest global oil consumer. This means refineries and consumes are only a few hours’ drive by truck or train from the oil producing wells.

While it is still early to know what the final outcome will be, it is no surprise that oil markets reacted quite indifferently to the events unfolding over the past three days in the Gulf region.

It will take far more destabilizing actions to force oil markets to react, and its questionable whether such destabilizing actions are in the interests of the parties that would benefit from more volatile oil prices.

The next Next Big Thing

December 12, 2015 on 7:03 pm | In Miscellaneous, Opinion, Technology | No Comments

There are two “buzz sectors” that have been grabbing a lot of attention in the media in the last few years: Ride sharing services, and autonomous cars.

We’ve been dreaming and talking about autonomous cars for decades. But its only in the last decade that technology finally reached a point where building one became feasible. One of the nice things in technology is that it takes the simple concept of economics of scale to a whole new dimension. That is, once something becomes feasible to make – at a considerably elevated cost initially – Moore’s “law” starts to really kick in and it becomes a downhill race to the bottom from there.

A decade ago, it literally took a Google to pull up the intellect and research and development effort to build an autonomous car. Sure, the DARPA challenge has been there for years before, with many teams from numerous research and academic institutions participating from around the world; but it was Google, with its deep pockets and ability to tap into vast intellects in its worker pool that managed to really crack the nut.

Once Google demonstrated it was feasible, all it took was Moore’s law – the doubling of computational power every 18-24 months – and compounding over a decade. Today every car maker, major or otherwise, is working on an autonomous car. GM, Ford, Toyota, Nissan, VW, Mercedes and BMW, and even Chinese makers like BYD have an autonomous car program in full swing.

Today, the question is not whether we’ll have such cars. That horse has been beaten to death now. The question has become when we, consumers, will be able to buy one? Estimates vary between 5-10 years. The focus today has shifted from solving the technological challenge to figuring the necessary legal and liability framework of how to operate those cars. And when you reach this stage, you know change IS coming.

The second buzz sector that has been garnering a lot of attention lately is ride sharing services. Like most new things, it’s a culmination of other technologies that made this possible; namely, the proliferation of smartphones, GPS, and mobile internet connectivity. The disruption here stems from its challenge to the conventional ride sharing establishment, taxis. Ride sharing services like Uber and Lyft not only offer transport to people who need it, they also offer the flexibility to would be drivers to work at their own leisure, using their own car, and for the most part setting their own fare. But where ride sharing really has a leg up is convenience and forcing the quality of the service substantially up compared to traditional taxis. An Uber user can see what other people thought of that driver and his service. Under this model, no one can survive providing average service. Excellent becomes the new “average”, for anything other than that simply becomes unacceptable.
What will happen when autonomous cars become a commodity in a connected world where individual transportation is only a few screen taps away?

The biggest cost in operating a taxi, or ride sharing service, is not the car, nor its fuel, nor its cost of maintenance. It’s the collection of organs, flesh and bones sitting behind the steering wheel. If that is taken out of the equation, even a top of the line luxury car becomes cheap to operate as a taxi, or taxi like service.

And this brings me to my next question: why would most people buy a car, when they can for the same if not lower monthly expense, summon a much better ride to take them anywhere they want, with the added convenience of not having to worry about parking space (and its associated cost in most large cities) nor the legal expenses and liabilities associated with owning and operating this car?

Which in turn brings me to that next next-big-thing I alluded at in the title: This consolidated autonomous personal transportation service sector is where, IMO, we’ll see the next big disruption in society. I doubt we’ll see companies like Uber and Lyft dominate this new sector. The only thing they bring to the table is convenience, once you take out the service quality of the extinct driver in an autonomous car. There is no competitive advantage in convenience. Anyone can replicate that.

In such a world, car companies stand to gain the most if they chose to enter this market. People like brands, and like to be associated with a brand. Design, quality and consistency are not easy to replicate. Scaling up in order to compete by driving costs down will require substantially greater efficiency in resource allocation, utilization, and cost control; factors that are not easy to replicate or imitate.

Car companies stand in a unique place today in that they already have the infrastructure and experience to operate such large scale services. In fact, we already have the seeds of such a service in manufacturers that provide long term car leasing and renting services to consumers. Barring incompetency and lack of imagination, it’s not much of a stretch from there to providing distance-metered ride on demand autonomous services.

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