When flows and stocks collide

By now you must have read the news about crude oil prices falling to $2 per barrel and oil futures (paying for future delivery) falling to negative territory.

This Bloomberg piece does a good job of explaining what exactly happened, so I’d recommend you read it in full.
The price on the futures contract for West Texas crude that is due to expire Tuesday fell into negative territory—minus $37.63 a barrel. The reason: with the pandemic bringing the economy to a standstill, there is so much unused oil sloshing around that American energy companies have run out of room to store it. And if there’s no place to put the oil, no one wants a crude contract that is about to come due.
Like much of what is happening around us these days, this too looks like something that no one ever foresaw. Except, it has been taking place in plain sight all over the world for decades.

Welcome to the inversion of flow and stock.

In normal times, the price of any commodity represents its value as flow or supply.

But with most of the world economy shut down and on lockdown, the $2 price for oil reflected its value as stock or storage.

Because if there aren’t enough vehicles, factories or refineries to use it, whoever does buy it will most likely have to store it.

And there simply isn’t enough storage capacity for all the oil that is being pumped out of wells around the world, including the US. Most countries have large national storage reservoirs, often called “Strategic Petroleum Reserves” or SPRs.

The US has the world’s largest SPR, located in gigantic underground salt caverns along its eastern coastline. And though it can hold 727 million barrels, it is nearly 90% full.

The SPRs for China, Japan and South Korea are 550 million barrels, 528 million barrels and 214 million barrels, respectively.

India, which is the world’s third largest oil importer, has an SPR that is trifling in comparison—39 million barrels.

Couldn’t crude oil producers just shut down production till things improve? Not so easily. 
Shutting down an oil well—called “capping”—is akin to abandoning it for good, because of the complexities involved. A capped well is in most cases gone for good.

Which means well owners don’t mind accepting any price, or even paying customers (what the negative prices represented) to sell their oil. As long as it saves them from capping their wells.

There is a third option, but one that no oil producer will dare exercise. To dump oil.
The minus $37.63 price for oil futures thus represents the inability of oil producers to dump it.

What about commodity producers who could dump their products when forced by Covid-19 to confront a lack of storage?

American farmers are dumping thousands of gallons of milk down the drain.
Source: CNN
Here’s a video of an Indian farmer dumping a truckload of his vineyard’s grapes into a pit.

Chinese farmers from Wuhan are dumping hundreds of tons of lotus roots.

Indian fishermen dumped 100,000 tonnes of mackerel, tuna, squid, ribbonfish, catfish and prawns into the sea.

Pineapple farmers and tea garden owners are dumping their produce in India.

Floriculturists are dumping millions of flowers in India.

Cows in the Indian state of Maharashtra are being fed strawberries.
Source: Reuters
What do you think would have been the prices (spot or future) for all of the milk, grapes, lotus roots, fish, pineapples or flowers being dumped if they could in any way be stored?

Conversely, what might have been the price of crude oil if it could be dumped?

Flows and stocks make up the world around us. And every now and then, the relative value we place on each of them inverts.

Sometimes flow also changes forcibly. Like in the case of Grab and Gojek drivers.
Crisis algorithms

Southeast’s Asia’s on-demand apps Gojek and Grab drivers in Indonesia want their flow of orders to be redistributed. 
They are now saying the existing matchmaking mechanism no longer makes sense. They are calling for a change—away from the priority matchmaking that favours hyper-committed drivers—to an even playing field, where each driver in the network has the same chance to get an order. 
Because, they say, right now, only priority drivers seem to be getting anything at all. Those with a normal status can barely make ends meet.
For this, they want the allocation algorithm of the app changed. 
What makes on-demand platforms tick is the way they match supply (drivers) with demand (customer orders). A platform needs to balance the interests of both, and in normal times, it skews towards favouring customers. They’re the ones who pay after all. So for instance, it’s ideal for the platform to have a surplus of drivers in an area of high demand, so that customer needs can be instantly met. Even if that means some drivers don’t get a match.
Which driver gets the match is governed by a complex algorithm. It favours those who rarely reject incoming orders and who work full time. They get a priority status which means they’re allocated more orders than others. The idea is this: the more committed and dependable you are as a driver, the more valuable you are in the system, and the more you’ll be rewarded.
At times when there’s a high volume of demand, it evens out. Eventually all drivers get some orders to fulfil, even the ones who don’t have priority status.
But in Covid-times, the number of orders has drastically gone down, so that calls for redistributing the flow. 
In a way, the threat of losing business, makes individuals and companies seize more control of their narrative. That’s what media companies in Australia too want.
Between media and big tech
There is a certain power equation that exists between big tech and news outlets.  News outlets do all the hard work by spending all the money to hire journalists and create content. Big tech rakes in the ad money on these platforms. Simply put, they have become the champions of something they never produce through digital ads. 
Australian authorities found out that 71% of the country’s ad revenue of $5 billion, excluding classified, goes to Google and Facebook. In 2018, Google earned $4.7 billion from the work done by American news publishers. That is almost equal to the entire ad revenue generated by the news industry.
The Australian government is having none of it now. Australia said that it will force big tech companies—Google and Facebook—to share more ad revenue with news media companies. This comes after France’s competition watchdog asked Google to do something similar 10 days ago.
Big tech and the Australian authorities have been in talks for a voluntary code of conduct for a few months now. It was supposed to be out by November; both Facebook and Google have been playing hardball. But with coronavirus shuttering 51 news outlets in Australia and with pressure from big news corporations Rupert Murdoch backed-NewsCorp, the country is putting forth a mandatory code of conduct by July.
The last time a country tried to force Google to share profits, the tech giant just switched off its service. But media companies might have better luck, thanks to, well, optics. Tech giants can’t afford to switch off information channels when they are needed the most. Also, it looks really bad if you actively put a struggling media company on life support.
But Australia and France’s move, if they succeed, would set a precedent across the world. Similar moves are expected in the United States and Germany as well. A journalism preservation and competition law is up for consideration before the US Congress as well. 
To think it is the virus that played a catalyst in making the media take the fight to big tech. It is also the virus that is exposing the chinks in the organised, high-stakes business called higher education. 
Is higher education a Ponzi scheme?


Higher education is a massive business in the US. Over 20 million students across 4000+ colleges generated $650 billion in revenue each year. In 2016-17.
The coronavirus forced campuses to shut down at a time when higher education, which employs nearly four million people across the country, was already facing major challenges. Population declines are expected to reduce enrollment, even as skyrocketing tuition and student debt have led to questions about whether a college education is worth the cost.

In mid-March, Moody’s Investors Service downgraded the outlook for higher education from stable to negative, predicting that institutions with strong endowments and cash flow, like Harvard or Stanford, would weather the virus, while smaller ones would not. After Coronavirus, Colleges Worry: Will Students Come Back?, The New York Times
But is higher education also, err, a Ponzi Scheme?
Higher education today resembles a massive Ponzi scheme. Colleges desperately recruit ever more marginal students who stand little chance of graduating. Before their inevitable withdrawal, those students’ tuition dollars fuel the growth of the bureaucracy, which creates the need to get an even larger pool of likely dropouts through the door to fund the latest round of administrative expansion. Administrative positions at colleges and universities grew at ten times the rate of tenured faculty positions from 1993 to 2009, according to academic consulting firm ABC Insights. By the 2013 school year, there were slightly more campus administrators nationwide than faculty; spending on the bureaucracy was equal to spending on all educational functions, including faculty. Tuition rose to cover those bureaucratic expenses, regardless of whether families could afford to pay it. Tuition at private four-year colleges grew 250 percent from 1982 to 2012, while the median family income rose about 18 percent, adjusted for inflation, according to ABC Insights. Since the 2008 recession, tuition at four-year public colleges rose 35 percent. Call It a Ponzi Scheme, City Journal
Wow, is it? Really? Has Covid-19 taken down the edifice of higher education and exposed it for the Ponzi scheme it really is?

These results are from just the first two pages of search results on DuckDuckGo.

–       June 2016: “Can We Just Admit College Is A Giant Ponzi Scheme?”

–       September 2014: “Academic Fraud and the Ponzi Scheme of “Higher Learning””

–       August 2015: “Higher Education As Ponzi Scheme”

–       May 2015: “Higher Education Is a Giant Ponzi Scheme”

–       May 2012: “Is Higher Education A Giant Pyramid Scheme?”

–       August 2010: “Why higher education is like a Ponzi scheme”

Now, forget travelling to the US for higher education for a second. Travelling even within the confines of a city is a challenge, but that’s something on-demand mobility startups now want to take into their hands.
Twist in the road for on-demand mobility
The on-demand economy—from groceries to math lessons—is growing under lockdown. But all of this contributes to near-zero movement. We’ve suspended travel to curb the virus from travelling with us. But it’s badly bugged a once-thriving market for on-demand transport. Globally.
Source: Quartz
The key evangelists of the on-demand, micro-commute Bounce and Vogo could’ve chosen to sit out the pandemic. Slash prices for the future. Keep disinfecting their scooter in the hope that customers will choose convenience over willpower when it comes to on-demand transport.   But both Bounce and Vogo have decided to pivot, at least partially, to something different. Which wasn’t the most…obvious choice.
Source: Bounce and Vogo’s Linkedin pages
Not a lot of people will remember Bounce was actually all about day-long (or longer) rentals when it started off. But the focus, for the last two years, has been solely on making on-demand, short-distance travel a workable business model with passable, if not great, unit economics. Vivekananda Hallekere, the co-founder of Bounce even claimed the red-and-yellow scooters could step in where public transport is spotty.
Covid has brought a rather rude stop to these plans. In fact, it’s done one better. It has forced Bounce and Vogo’s hand. 
Think about it. For companies like Bounce and Vogo, circulation of the asset is the key. More people, more rides, more revenue. That’s how you make money on a depreciating asset. Long-term rentals are an anathema to the on-demand model. Will scooters parked in one office building, in one corner of the city, push the asset to its maximum potential? Likely not. Or at least not initially.
One could argue that this is a futuristic move. Timed to perfection with the lockdown easing up in at least some parts of the country. But it’s also the riskiest play in the book.
Corporates will barely manage to sanitise within their buildings and follow all the strict post-lockdown social distancing rules. How do they also keep leased vehicles sanitised? It would make sense if this was a service Bounce or Vogo provided constantly. There’s also the question of what or who is going to be “essential” in a pandemic. As long as it was delivery personnel, it made sense. But will your run-of-the-mill IT office take the chance?
Proper sanitisation is going to be a hot potato between leasing companies and offices. Till the time that’s figured out, the old-new business model will only be emergent by half.
Disinfection dud
The disinfectant tunnel is dead. In the initial days of the pandemic, it was enthusiastically adopted by states like Tamil Nadu, Telangana and Kerala to hose down people. It turns out, the combination of water and sodium hypochlorite which covered people in a mist, is actually an irritant to skin and eyes.
Also, as doctors point out, the super spray is useless because the virus lives inside the body, not outside. Experts were also worried that people wouldn’t wash their hands as much, and rely completely on these disinfectant tunnels. Duh. 
How do you spur food deliveries?

–       By funding part of the cost of each delivery trip. ✅

–       By incentivising restaurants to create cloud kitchens and virtual brands ✅

–       By funding online to offline (O2O) initiatives ✅

If you’re the government of Singapore, the answer is all three. Here’s its “Food Delivery Booster Package”.

Fascinating, the level of thinking and foresight involved. (Hat tip: Singapore F&B entrepreneur Colin Chen)
Beat the blues
  We might be apart, but we’re definitely united in all the lockdown weirdness. Reply All is a podcast that turns the oddest things in life into hour-long, hilarious banter between two hosts. Now the hosts and their producers are stuck at home. So they’re calling people around the world for their lockdown stories. Featuring: How walking dogs is now a national pastime in Paris, because it’s the only excuse to get out of the house.

Leave a Comment