Congratulations to the EU - sanctions on the most fungible oil

Yes, yes, we know, something must be done and something must be seen to be done. It’s just that deliberately crafting sanctions so as to only impact the most fungible part of the supply is more than a little odd. Ineffective even - even if it does mean that something is being seen to be done:

EU bans majority of Russian oil imports

Huzzah, we are saved - or Europe is and can hold its head up among the community of nations again. Except for the little details of course:

Since the invasion of Ukraine on February 24 the EU’s 27 member states have paid Russia a total of €56.5 billion for energy, providing vital revenue for Putin’s war machine. The lion’s share, almost €30 billion, is accounted for by crude oil supplies.

To cut off the cash to Russia, the EU had planned to ban all oil imports by the end of this year but the talks have stalled over the impact of shutting off pipeline oil to landlocked countries and fears of soaring crude prices.

The compromise plan, agreed at a dinner last night, will exempt imports delivered by pipeline.

The row pivots on the Soviet-era Druzhba, or “friendship”, pipeline which brings oil from Siberia to eastern Germany, Poland, Slovakia, Hungary, Slovenia and the Czech Republic.

Ah. Ship bourne oil can be moved anywhere in the world - adaptable things, ships. So, what will happen is that the EU will get its oil notfromRussia. The Russian oil will now flow to whoever would originally have bought the notfromRussia oil but now can’t have it because the EU does.

The end effect here - as it always will be with something as fungible as oil - is not very much. Russia will make around and about the same income from oil exports, the world will consume around and about the same amount of Russian oil, it’ll just be a few tanker crews away from home for longer.

Of course, the oil coming by pipeline is not fungible in anything like the same sense. So restricting pipeline access to the EU market really would reduce Russian oil revenues (and produce the odd problem within the EU too). Which is what wasn’t done.

So, the sanctions are on the most fungible, “redirectable”, part of the oil flow and nothing is to be done about the part that might have had a significant effect. But something was seen to be done and that’s the important part of politics, isn’t it.

The End of End-to-End Encryption

WhatsApp, the instant messaging service with more than 1.3 billion users worldwide, uses end-to-end encryption as a security feature. When you send a message, the content or data in it is encrypted, which means it is turned into an unreadable code that can only be mathematically deciphered by those who have the secret key.  End-to-end encryption provides the strongest level of trust and security as only the sender and the recipient have the key, so even the owner or programmer who designed WhatApp cannot read the messages. If your message is intercepted by a third party, the message will remain illegible gibberish. Modern encryption is tough to break because the number of possible keys far exceeds the number of guesses that even today’s fastest computers can make in a reasonable time. It is a cheap, safe and secure method of data protection. Hence, Whatsapp users can, at least for now, be reassured that only the intended recipients can read the messages. The same goes for many other services, such as Zoom, Microsoft Teams and FaceTime. 

Unfortunately, the Online Safety Bill, which has already passed its second reading in the House of Commons will force companies to compromise on these security features.

Although the original intent of the Bill, which promises to prevent users from being exposed to harmful content such as terroism and child abuse, is a noble one, the Bill has wide-ranging implications on security features like end-to-end encryption.

Clause 103(2) of the draft legislation allows the Office of Communication (OFCOM) to issue a notice requiring service providers to use ‘accredited technology’ to identify child abuse content, whether communicated publicly or privately. Clause 92(4) then makes it an offence for the provider to give ‘information which is encrypted such that it is not possible for OFCOM to understand it, or produces a document which is encrypted such that it is not possible for OFCOM to understand the information it contains’. Schedule 12 of the Bill further stipulates that failure to comply can lead to fines of up to £18 million or 10% of global revenue.

The regulatory framework and the penalties will necessitate companies to weaken encryption in order to intercept communications and avoid violating the duty of care placed on them. Lawmakers have claimed that the Bill does not remove the end-to-end encryption as it simply requires companies to install ‘encryption backdoors’ to allow ‘exceptional access’ to law enforcement agencies. This is however technologically impossible, as end-to-end encryption by definition does not allow third parties to hold the key to encryption.

It is easy to miscategorise the issue as a classic dilemma between privacy and security,  but the truth is that the Bill promotes neither. There is not a backdoor that will only let the ‘good guys’ in. Creating a backdoor for law enforcement will also create an opening for criminals and hostile actors to exploit. In 2015, Juniper Network Inc. discovered an unauthorised code in their firewall ScreenOS that allowed hackers to decipher encrypted information to gain access to the network of their customers. A probe into the cause suggested that there was an intentional flaw in the encryption algorithm Dual_EC, which was deliberately designed to include a backdoor enabling the US National Spy Agency to eavesdrop on overseas clients of Juniper. The opening has rendered the system vulnerable to cyberattacks. The lesson to learn from this incident is that any backdoor in the encryption algorithm is a security risk.

Adding to security risk is the extremely broad discretionary power given to the Secretary of State. The government might assure the public that email services, at least for now, are exempted from the Bill. However, clause 174(9) empowers the Secretary of State to add or remove services from the exemption list, so the scope of the legislation might broaden in the future. This will create a chilling effect; service providers who are currently exempted might opt to weaken encryption to conform to the potential effect of the Bill in the future. 

The Government promised that the Online Safety Bill would deliver their manifesto commitment to make the UK the ‘safest place in the world to be online’; but in actuality the legislation undermines both privacy and security, leaving individuals and companies vulnerable to data leakage. By compelling the removal of end-to-end encryption, the Bill effectively spells the end of private conversation. As UN Special Rapporteur on freedom of expression David Kaye said, ‘national laws should recognize that individuals are free to protect the privacy of their digital communications by using encryption technology’. The Online Safety Bill in its current form does not promote safety. It needs to be re-drafted to be compatible with end-to-end encryption.

Theodore Ka Fai Fung is an intern at Adam Smith Institute. Currently a law student at King’s College London, he is a strong advocate for holding the government accountable. Throughout his internship, he researched into the impact of the Online Safety Bill on encryption, as well as the effect of the electronic monitoring of protestors proposed in the Public Order Bill on civil liberties.

The basic economic structure is really quite important

Leave aside the details for a moment. Sanctions, busting of them, all of that. We’d also not try to claim that current day Russia is some laissez faire paradise. We can though still make a useful point about the really basic economic structure:

Pakistan is set to import two million metric tonnes (MT) of wheat from Russia with cash payment

Russia is a wheat exporter. Which is a startling change from earlier decades of course. When one of the grand obsessions of the international food trade was where is the Soviet Union going to import its wheat from?

Again, we do not claim that Russia is currently a free market paradise. Nor do we think that Tsarist Russia was one of those either. And yet both Tsarist Russia and the current day one are major gain exporters. The Soviet Union was a major grain importer.

The Soviet Union also had a thoroughly planned and scientifically underpinned food production system with no even hint of any market influences. So much for planned food production systems without either market prices or market incentives.

As varied types wibble about how government must do more to plan and support British farming that’s a lesson that’s well worth recalling.

No?

The TaxPayers' Alliance is correct

As so often, the TaxPayers’ Alliance has correctly analyzed what the government should be doing to redress the cost-of-living crisis. Instead of the Rishi Sunak largesse of handing out sacks of money that will ultimately have to be funded by taxpayers, he should, say the TPA, refrain from taking their money in the first place, but leaving it in their pockets instead.

The TPA’s three-point plan calls for the proposed income tax cut to be brought forward, the National Insurance increase to be scrapped, and for the green levies on energy bills to be abolished. It’s a bold initiative that would put into people’s pockets some of the money they would otherwise have to hand over to the Treasury. The government itself is a huge cause of the cost-of-living crisis. Its tax burden, the highest since the postwar Labour government of Clement Attlee, is not only making people poorer, it is also holding back the economic recovery the UK needs to make us all richer.

As John O’Connell, the TPA‘s Chief Executive puts it:

"Lower taxes boost the economy, letting people spend where they see fit. You can’t tax your way to higher growth, and you can’t spend your way out of an inflation crisis."

The UK Treasury seems to think otherwise, increasing taxes that will hold back growth when they should be promoting it, and responding to inflation by increasing spending. What the government should be doing is cutting spending by examining what each department does, and cutting back on the non-essentials and low priorities. If they cut spending, they can reduce the burden of taxation.

Chancellor Rishi Sunak is bidding for Gordon Brown’s title of a high tax, big spending Chancellor and, like Gordon Brown, has saddled the public with stealth taxes that many do not realize they are paying.

There is a mindset in the Treasury that thinks they can micro-manage the economy. They cannot, because the economy is not a thing that can be tweaked and twiddled to produce a sought-after outcome. It is a process, one that sees zillions on inputs interacting with each other, and producing an outcome that reflects the real world rather than some elegant model of it.

The TPA’s recommendations are ones that would set free more of the real-world economy to achieve more of the growth that the country badly needs. This is something the ASI supports and is making its own contributions towards.

It's the economic ignorance that's so painful

We seem to be approaching an Online Sales Tax. The arguments in favour of which are based on an entire ignorance of the difference between business rates and such a sales tax. Rates are a tax upon landlords. Sales taxes are a tax upon consumers. Why would we want to switch our tax collections from landlords to consumers? This doesn’t work in any moral sense and it also doesn’t work in basic theory - we desire to tax where supply is most inelastic and therefore deadweights are lowest. There’s really nothing less elastic in supply than land.

But we seem to be getting there:

The companies’ intervention follows the close of a three-month consultation on the measure, which the Treasury has said could be used to overcome an “imbalance” between tax levied on retailers online and those in high streets, by funding business rates cuts.

The Treasury states that the consultation was “exploratory” and that it has not yet made a decision on whether to introduce an online sales tax (OST).

Even the basic consideration there is wrong. Rates are not upon retailers, nor is a sales tax.

That rates are a tax upon landlords is well established. We have pointed it out before here. This is something so well established that even Demos, of all people, manage to get it right:

The economic theory suggests that the burden of business rates and commercial rents on high street businesses is relatively fixed in the long run. This is because any cut in rates leads to an increase in demand for commercial space, as it becomes more attractive and affordable to retailers. In the long-term, this higher demand means that commercial landlords are able to charge higher prices for this commercial space - i.e. an increase in rents. As a result, the long-term effect of any cut in rates is negligible for tenants, as landlords raise rents in response to any reduction in the burden of business rates.

Crucially, the theory appears to be borne out in reality too. For example, Bond et al examined the impact of changes to business rates on 3000 commercial premises in the UK. This research found that: “increases in non-domestic rates put downward pressure on rents, whilst decreases in non-domestic rates put upward pressure on rents.” In other words, the cut in business rates led to higher demand for commercial premises, meaning that landlords raised the prices (i.e. rents) paid by tenants. The empirical evidence appears to match the theory.

So, who is it that doesn’t grasp this?

However, we will continue to consider the arguments for and against an Online Sales Tax which, if introduced, would raise revenue to fund business rates reductions.

That’s the Chancellor, in a Treasury publication. Who both clearly do not understand the above. Rates are a tax upon landlords, sales taxes are a tax upon consumers. Why would we wish to increase the taxation upon consumers in order to provide tax breaks for landlords?

In the absence of some grandly nefarious plan by landlords the only reason we can think of is that the people who are designing our tax system are ignorant of tax systems. Which is a profoundly painful thing to contemplate.

Folk become billionaires by providing needs, do they? Well we never....

There’s much to laugh at here from the Progressive Economy Forum. The insistence that high fuel prices must be battled when it’s been public policy to increase the relative price of fossil fuels as against renewables for decades now just as one example. The calling into the conversation of the horrors of economic rents when the major earners of said rents are - righteously - governments on such fossil fuels.

This amuses:

The Competition and Markets Authority last week reported that “mark ups” on prices, the amount added to the costs of something being sold in order to give the seller a profit, by the biggest and most profitable companies have risen from 58% in 2008 to 82% in 2020.

Mark up and gross profit are intimately related. Gross profit being revenues minus the cost of goods sold - and before the payment of wages. So, the result of mark ups rising is that more of the revenue from sales is going to the workers in wages. And progressives are complaining about this?

But our favourite chuckle generator here is this:

As Oxfam’s research showed this week, the pandemic and its aftermath have seen the world’s super-rich become monstrously richer. And it is the owners of the essentials of modern life – in food, energy, pharmaceuticals and tech – that have seen the fastest growth in their wealth, with a new billionaire created every 30 hours.

Isn’t that marvellous? The inventors and producers of new foods - meatless meat perhaps - fracking, vaccines and smartphones get gloriously rich. Even as 97% of the benefits of the technologies flow to us, the consumers. This putting us everyday folk on the right end of the greatest bargain in history. Sure, the guys at Google have a fleet of jets, one estimate has the value of search and email to each consumer at $18,000 a year. Multiply that out by a few billion consumers and who cares how rich the innovators are, it’s us out here making out like bandits.

People become billionaires by providing what folk desire do they? And this is being used as a critique of the one and only economic system that has ever made the average guy and or gal rich, is it?

James Meadway is director of the Progressive Economy Forum

We’d have to grade this as F -. See us after class. For free market capitalism sure ain’t perfect but this essay manages to miss the very point of it.

As we've been saying, stranded carbon assets aren't a problem

For some time now we’ve been pointing out that the worries over stranded carbon assets are overblown. This idea that all those oil rigs and fields and pumps and so on will become worthless and so the globe will face some enormous financial shock as we go green. The reason it’s overblown is that the idea fails to take note of the base climate change problem itself - discount rates.

As the Stern Review went to great pains (hundreds of pages in fact) to point out, the base problem is that we humans value the far future through the lens of market interest rates. As these are up in the 5 to 7% range this means that things which happen 50 years out are of near no net present value. That’s why Stern insists that claimte change must be evaluated using a much lower discount rate.

Assuming that all of this is true then that means that the net present value of those fossil fuel assets out in that future must be somewhere near spit. Therefore even if the value does collapse it will be from not very much to that near nothing. It’s not a problem.

The Guardian reports on a paper which makes exactly the right calculation on this. It being The Guardian of course it gets the conclusion of the paper wrong but there we are, that’s The G for us.

People in US and UK face huge financial hit if fossil fuels lose value, study shows

Strong climate action could wipe $756bn from individuals’ pension funds and other investments in rich countries

It’s the word “huge” there which is wrong.

It’s possible to quibble a bit about the assumptions made in the paper.

Our focus is on the medium realignment, in which the baseline scenario follows IEA’s WEO 2019 current policies scenario, consistent with 3.5 °C median warming in the 21st century.

That’s too high as a baseline, current policy is already well below that. But that’s the assumption they make and the paper still proves that this just isn’t a problem. The reason is this:

We discount differences in expected profits by 6% y−1

OK, we’ve introduced something akin to, close to, market interest rates. We are discounting those future values by the right number that is. The result is:

Overall, the study calculated that individuals own 54% of the $1.4tn oil and gas assets at risk – $756bn.

Global wealth is around the $500 trillion mark. Thereabouts, right sort of order of magnitude at least. The losses therefore look like 0.15% of asset value. That’s the sort of thing the global economy can take in its stride.

The countries hit hardest by losses in the financial sector would be the US, with $283bn at risk, and the UK ($98bn),

American wealth is around $140 trillion at present. UK household wealth some £14 trillion or so. Even if we take off property values the pensions and financial wealth (the paper worries that some substantial part of such losses will be to pension funds) we’re still at about £6 trillion. So, even if doom were to come to pass we’re talking about 1.6% or so of the financial wealth of the UK as a result of the entire collapse of the value of those fossil fuel assets.

Financial markets can vary by such percentages over the course of a week - heck, on exciting days, in mere hours.

That is, by taking the argument seriously, we can see that it’s not in fact a problem. Stranded fossil fuel assets, even if it does in fact all work out like they say it could, are trivial compared to the wealth of the world, or individual nations, or even the British people.

Great, so that’s another thing we don’t have to worry about then. As we’ve been pointing out for some time now.

We do think these worries over critical minerals are overblown

There’s a certain hype over supplies of critical minerals out there. The EV revolution will require much more of this and that and t’other and dearie us, where will it all come from? As we’ve pointed out at book (even if short book and free) length there is no shortage of the elements themselves. Whatever shortage there is remains limited to active producers.

Take lithium, one of those oft talked about metals required. What gets missed is the sheer scale of activity already going on. The London Stock Exchange alone has half a dozen companies. That’s just those with lithium in their names. Another one, Bacanora, was just bought out. We can think of another half dozen at least that are listed, are looking for or even producing, and yet they just don’t use lithium in their corporate title. New York has more than another handful and the Toronto Exchange, long a rival to London for mining exploration companies, has a positive rash of them. All before we even get to the still private companies.

This is before we even get into the technological changes going on. Traditionally lithium has been provided either by the mining of spodumene (which is “hard rock” mining, which means just what you think it does) or the evaporation of brines. Neither of which is in short supply at all. Investment in Chilean brines has been held back by a strange quirk of that country’s mining law (as lithium can be used in hydrogen bombs it’s necessary to gain a licence to mine it from the nuclear ministry, they’ve never granted one, only grandfathered licences have been allowed) and over the border in Bolivia they have been insisting that not just the batteries, but the cars themselves, must be made up on the altiplano if the lithium is to be extracted. This has been limiting the enthusiasm to mine there, of course.

It is true that China has something of a lock on the processing of that spodumene (actually, the concentrate from it) into usable lithium salts. A position that it maintains by trying to buy into every new spodumene deposit that folk think of exploiting. Which is a terrific source of capital for those with a spodumene deposit.

But the frenzy for the metal has led to a distinct investment in alternative sources as well. The zinnwaldite (a mica) of the Ore Mountains has been proven as a resource - at current lithium prices it certainly is. Various companies are showing that Li in geothermal waters is extractable - we know at least three and know of another half a dozen. We’ve seen a claim - one that we don’t believe even at current inflated prices but it is a claim that has been made - that the Red Sea contains a high enough concentration for modern membrane technologies to extract. Desalination plants - technically feasible to extract from, economically, well, possibly.

Then there’re the clay deposits that abound.

Our point is not that nothing needed to be done. It is that what needed to be done has been done. The temptations of those predictions of higher use combined with free market capitalism have done it. Free markets mean that anyone with an idea may try it. Capitalism that those who have a good idea gain riches and hot and cold running Ferraris from having done so. The combination means that the world is awash with lithium production plans. More mines using the old tech, new techs to exploit previously unthought of sources.

That is, it’s all already done. Just through that system we’ve got of channelling greed. No plans nor bureaucracy desired - or perhaps less of both like that Chilean nuclear ministry or the Bolivian car factories.

Bolstering us in these beliefs is that the last time everyone got excited by lithium, back in 2012/3, a number of projects got financed. One of which built a perfectly good spodumene mine and has also recently gone bust. Because there was so much new material flooding the market that expectations were dashed.

The TL:DR version of this is that sure, lithium, important stuff, we need a plan, a system, to extract more of it. Good, we’ve got one, free market capitalism. The joy of this plan is that it actually works. Further, while every bureaucrat in the world is typing up plans for the national lithium industry that free market capitalism has already solved the problem.

This is not investment advice, we hope you understand, but our prediction is that there’s going to be a glut of lithium in about 5 years. Simply because that terribly simple system of freedom and incentives does in fact work.

As we keep saying, prices are information, Minette

Minette Batters seems to have a certain problem in absorbing information from the universe around her. It’s this failure to understand that prices are information again.

The price of animal feed wheat, relative to bread milling wheat, has risen. Ms. Batters therefore insists that something must be done to ensure that farmers continue to plant bread wheat:

Minette Batters, president of the National Farmers’ Union, warned that there was a "real danger in this world that farmers actually just decide to produce wheat to feed pigs and poultry, because they know they're going to be guaranteed a good price".

"That will leave the bread market short. We must be making sure that farmers are not just producing feed wheat, and that we are incentivising them in those decisions that will be made in the next few months."

That is, of course, entirely the wrong thing to be doing. The change in the relative prices is exactly the signal that we should not in fact be doing that.

We all get richer when economic assets are moved from lower valued uses to higher. Economic assets here include arable land, tractors, fertiliser, seed, the labour of farmers and so on. If the value brought in by those assets producing feed wheat is higher than that created by bread wheat then we don’t want to stop farmers switching, we positively lust after their doing so. For that is exactly what makes us all collectively richer. Our scarce economic resources are now producing more value - we’re richer.

If bread wheat is of lower value then we desire the bread wheat market to gain smaller supplies.

Of course, that Ms. Batters is of the National Farmers Union could be the explanation, just a preparation for another raid on our collective wallet. But we fear that it really could be just not grasping the importance of the information provided by prices. If feed wheat is now worth more relative to bread wheat we don’t want to plan - or force - farmers to produce more bread wheat, we want them to follow those price incentives and produce more of the more valuable varietal.

Surely this isn’t that difficult to understand?

Banning big bets

The government’s review of gambling, designed to update gambling regulation for the digital age, has been long drawn out, derailed by distractions like partygate and much else. But a gambling White Paper is at last being ‘finalised’ and is expected to appear soon. And one of the proposals, a little bird tells me, is to limit the amount of money that punters can gamble online. This, the idea is, will prevent people from gambling more than they can afford online.

I should declare an interest — or lack of it: I don’t receive any money from betting companies, online or traditional. But I still think this is a very bad idea.

For a start, it tries to solve the problem that a few people have by putting restrictions on everyone, not just the few. We don’t tackle alcohol addiction by restricting the number of bottles that anyone can buy in the supermarket, any more than we combat heavy smoking by restricting how many cigarettes people can buy. Instead we use well-placed warnings, and ensure that resources — public and private — are focused on the few at most risk.

If you come into a windfall and decide to bet it all in an online casino, that should be your affair. But this proposal will stop large bets like this, even if they are infrequent or one-off. Remember too that some people make their living by betting — mostly by using their specialist knowledge to get the edge over other gamblers, and the gambling companies. So that is their livelihood effectively taken away.

And talking about livelihoods, 60% of online gambling operates from Gibraltar — a well-regulated British overseas territory. Preventing large bets, even from people who know what they are doing, will make a big dent in Gibraltar’s economy. It’s basically a rock, and apart from tourism, it hasn’t much else going for it. I can’t imagine that the Foreign Secretary would be particularly pleased by this prospect.

In fact, online gambling companies already have ways to deal with problem gamblers, methods that are far more subtle and effective than any government-designed blanket spending limit. Many companies allow customers to set their own limits, for example. And companies can (and do) use algorithms to detect when people seem to be overdoing things, and pause their gambling. After all, it is better for their reputation if they do this rather than let customers get into problems.

It’s certainly better that problem gamblers patronise responsible companies that can help them control their spending and maybe even advise on treatment for gambling addiction. Spending limits on everyone will simply drive them towards illegal and unregulated sites where they will have no such protection or help. Even responsible but large gamblers might well be prompted into the illegal sector too, if they find themselves blocked by legal companies. That will do them no good, only potential harm. 

The government’s proposal would require a big bureaucracy to police it, though no doubt it will try to load the cost onto the gambling providers. That just means less attractive odds for customers. But even so, government will need its own bureaucracy to check that the online gambling companies are actually and effectively setting the limits.

As I say, I haven’t taken the shilling of any gaming provider. Nor have they taken mine — I don’t gamble because I just can’t see the point, particularly of casino-type games. But I still think that this idea, if the government really is contemplating it, is an assault on all our liberties and will prove ineffective and indeed counterproductive in terms of its purpose.