Saudi Arabia to Reduce Oil, Export Electricity

Saudi Arabia says it is ready to start phasing out fossil fuels. It is a surprising change in strategy from one of the world’s largest oil producers and consumers and the country with the most extreme oil subsidies. Those subsidies, though, will be phased out over the next 10 to 20 years, a key step in reducing carbon emissions to try to stabilize the global climate. By 2040 Saudi Arabia plans to replace most of its oil consumption with electricity. The country could easily generate from renewable sources more electricity than it uses. Its plan is to export electricity to neighboring countries, but that probably won’t work, with countries like Kuwait and Egypt also able to generate a surplus of electricity. Probably somehow the region’s electric output could be exported to cloudier places. Turkey and Europe will likely remain energy importers and would gain a measure of economic stability with the addition of a large-scale new source of energy. Another scenario is that a country with an excess of electricity could desalinate water and export it through pipelines. Water, of course, will become more scarce in many places over the next century.

Saudi Arabia must start to make plans for a post-oil economy, as its oil is becoming more expensive to find and extract. By starting now, it can make the transition gradually and smoothly.

This Week in Bank Failures

Five giant international banks agreed to U.S. guilty pleas for market manipulation in either interest rates or currency exchange rates. All were quickly granted waivers from the SEC to allow them to continue to operate in the securities business. Rules ordinarily ban criminals from issuing securities. The too-big-to-fail banks are exempt from this rule, but the exemption requires a formal SEC action for each criminal conviction. The banks will be looking for a similar exemption that covers the retirement funds they manage. In addition to the guilty pleas, the banks agreed to pay an average of $1 billion each in fines.

BNY Mellon will pay $180 million to settle charges of currency exchange transaction fraud. For years the bank retroactively assigned the least favorable currency exchange transactions of each trading day to managed funds, mostly retirement funds, in violation of its contracts with the funds.

Corporate credit unions ended up holding piles of bad assets after the real estate bust of 2008. It was the derivatives that did the most damage, but there was also actual real estate that served as collateral for failed loans. It was left to the NCUA to sell off that real estate, and it completed that process in the first quarter of 2015. That is a sign that the NCUA is done with the heavy lifting in the difficult process of rehabilitating the corporate credit unions.

Air Bags and Aging

The Takata air bag recall announced today is in some sense the largest product recall ever. The number of units recalled, 35 million, is not so large by itself, but these are cars, and the defective part is something that could blow up in your face.

An obvious problem in designing auto parts is making something that can last for the useful life of a car. How do you test the long-term strength and stability of a manufactured product, and then deliver it to market next year? Part of the answer is accelerated aging, a rubric that covers a wide range of testing techniques for making manufactured products break down faster than they would in actual use. The results are imprecise by nature, and it is hard to know how far you can rely on the conclusions. Unfortunately, this also means that business executives looking at accelerated aging test data can easily convince themselves that their latest designs are far more durable than they will turn out to be in practice.

Aging is a factor in the breakdown of the defective Takata air bags. It took years to discover the extent of the defects, and that was mainly because the air bags would develop the tendency to rupture spontaneously only after years of actual use. The aging of automobiles generally is also a factor. The expectation a generation ago that a car should run at least five years has stretched out to twenty, and as we go into the electric car era that number will only go up. As cars get older we continue to discover parts that we wish had been made a little tougher when the cars were first put together. Maybe the defective air bags fall into this category. I haven’t seen anything to indicate that Takata was designing products to last for just five years, but after the fact, some of the failure data looks like that of a five-year product. Most of the recalled cars are more than seven years old, a long enough time to discover that the air bag designs were not as physically stable and durable as they needed to be.

Consumer Mood in the Walmart Report

The quarterly report from Walmart reinforces the thought that U.S. consumers are not in a shopping mood so far this year. Same-store sales were up 1.1 percent from the year before, but groceries were flat and sales at Sam’s Club were down slightly. We would expect lower gasoline prices to make people more willing to drive to local and regional stores for shopping, but the effect is hard to find even after adjusting for unfavorable weather. Walmart CEO Doug McMillon said on the earnings call,

. . . many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings.

I have to imagine that part of the shift is that appliances are becoming more durable, so that the occasions that force people to go shopping occur less often. But there is more to it than that. My own Walmart purchase during the quarter, a lawnmower, put me in position to buy a cartload of merchandise while I was in the store already, but it felt simpler and safer to get my one purchase out to the car and drive away. While in the store, I saw more than a few customers carefully comparing items on the shelves but ultimately not selecting anything to purchase. I have to assume these were shoppers who could not find what they went in for and also did not come upon anything compelling to buy.

What if shoppers just stopped shopping? I have yet to make a grocery shopping trip this month. When I think of buying groceries I remember that local produce will be available a few weeks from now. I will get a better deal if I wait. That, of course, is a shopper’s mantra in a period of deflation. Time pressure, debt, and other factors are making shoppers postpone shopping almost the way they would if prices were falling. Retailers have to look for ways to remain relevant.

Pentagon Rolls Back Arms for Police

Under a new policy announced today by the White House, the Pentagon will no longer give some of its military-style weapons to police forces. Local police forces will no longer get tanks, missile launchers, grenade launchers, and some of the largest automatic rifles. Armed aircraft are also on the list of prohibited equipment, though I am not aware of the Pentagon giving a bomber or an attack helicopter to a city police department anywhere.

The policy officially comes from a cabinet committee, but the careful tactical wording suggests it must be the result of a study done at the Pentagon. It is important to note that the new policy does not control what local police do, and only limits the actions of the federal government. A police force could, in theory, buy an attack helicopter with its own money, but not from the Pentagon.

This policy change is sure to be controversial, with culture-war pundits moaning about “disarming the police” while libertarians applaud the news that your local police force will no longer look like an invading army. The ultimate effects won’t provoke much controversy, though. If we heard, for example, that the Philadelphia police were planning to use missile launchers at the next national political convention, almost anyone would respond by saying, “Surely that’s not really necessary” (and I know more than a few people who would say something stronger than that).

Very little will change immediately, but the announcement rolling back the militarization of local police is important symbolically. Since Nixon, every U.S. president has participated in and voiced support for the trend of turning the United States into a police state. Today’s policy change is the first substantial move in the opposite direction.