Thursday, March 26, 2015

Wall Street Bonuses and America's Minimum Wage Earners

Recent news that the Wall Street banking system handed out bonuses totalling $28.5 billion to its 167,800 employees during 2014 is really not all that shocking, even when the bonuses are added to the average base salary of $190,970 (2013 average).  According to the New York State Comptroller, the average bonus paid in New York City's security industry rose by 2 percent in 2014, hitting $172,860 (or 3.3 times the median American household income in 2013) even though the industry was slightly less profitable in 2014 than it was in 2013.  This is the highest level of bonuses paid since the financial crisis.  In the two previous years, the average bonus rose by a total of 52 percent, far above the level in 2014.

A recent analysis from the Institute for Policy Studies helps to put the size of Wall Street's bonus pool into perspective in terms of those Americans who earn at the bottom of the nation's pay scale, America's minimum wage earners.  It is important to keep in mind that the creative minds of Wall Street were behind the near meltdown of the world's economy in 2008, largely because the system incentivizes high risk behaviours.

Here is a graphic showing the 2014 total annual earnings for the 1.007 million Americans earning the current federal minimum wage of $7.25 per hour:

During 2014, Wall Street bonuses totalled more than twice the total earnings of more than a million American minimum wage earners.

Let's frame the size of Wall Street's bonuses in terms of what it would do for millions of America's lowest paid workers who spend their working lives in restaurants, home health and personal care and the fast food industry:

The $28.5 billion would be nearly enough to raise the hourly wages of 1.5 million home health and personal care workers and 2.2 million fast food preparation and serving workers to the $15 per hour level.

As I have noted in a previous posting, while wealthy Americans can afford to purchase more goods than poorer Americans on an individual basis, on a group basis, the purchasing power of the less well off masses is substantially greater.  After all, how many toasters will one billionaire purchase compared to the number purchased by hundreds or thousands of middle class households?  Based on the standard fiscal multipliers used by Moody's Analytics, every dollar that goes into the pockets of lower-wage workers adds about $1.21 to the national economy compared to only $0.39 for high income earners.  As shown in this graphic, if the $28.5 billion in bonuses had been allocated to minimum wage earners, GDP in 2014 would have grown by $34.5 billion rather than the $11 billion when the entire bonus pool ends up in the wallets of Wall Streeters:

Interestingly, the New York State Comptroller notes that "...the cost of legal settlements related to the 2008 financial crisis continues to be a drag on Wall Street profits, but the securities industry remains profitable and well-compensated even as it adjusts to regulatory changes."   That said, after record losses during the financial crisis, the security industry has been profitable for six consecutive years, including the three best years on record.

Despite the fact that the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into federal law on July 21, 2010, very little has been done to reign in the connection between bonuses and reckless, high risk behaviour.  Section 956, the section of Dodd Frank that requires "...enhanced disclosure of incentive-based compensation arrangements and prohibits covered financial institutions from offering incentive-based compensation arrangements that encourage covered persons to expose the institution to inappropriate risks by providing the covered persons excessive compensation" has still not been adopted.  With Wall Street's ever-growing bonus pool and its endless line of creative financial products, we could well be setting ourselves up for the next financial crisis.

Tuesday, March 24, 2015

The Propaganda War With Russia

There is an interesting twist to the ongoing war of words with Russia over its actions in Ukraine that is little discussed in the mainstream media.  The United States State Department is using its Russian language UkrProgress Twitter account with the hashtag #UnitedforUkraine to counter what the United States considers to be Russian propaganda on its activities in Ukraine.  While most of the tweets are in Russian, here are some of the more interesting English language posts by the State Department:

If you follow the links listed on the tweets, many of them take you to stories on the ShareAmerica website.  What is ShareAmerica?  It is the Department of State's "...platform for sharing compelling stories and images that spark discussion and debate on important topics like democracy, freedom of expression, innovation, entrepreneurship, education and the role of civil society."  In other words, propaganda from a State Department/Washington viewpoint.

And, as though it really matters, the State Department seems to feel that voting on a new design for police cars in Kyiv is a positive sign of democratic reform in Ukraine:

And, just so it doesn't appear that the United States stands alone, here is a tweet showing that Canada stands behind Ukraine:

To close, here are two interesting tweets showing the high cost of the Russian takeover of Crimea when it comes to buying groceries and the high economic cost of the "illegal referendum":

The use of a social media account permits the U.S. Department of State to take a much harsher and unrestricted stand against Russia than normal official diplomatic statements would allow.

Monday, March 23, 2015

Ted Cruz and His Donor Base

With Ted Cruz heading toward a 2016 run for President, I wanted to take a look at who his important supporters are, you know, the ones that speak with dollars.  The ones that he will really listen to.

From Open Secrets, here is a look at his top twenty contributors for the period from 2013 to 2014:

Note the $69,350 from Goldman Sachs?  Cruz's wife, Heidi Nelson Cruz, is a managing director at Goldman Sachs, Ted Cruz's fourth biggest donor.  While Cruz took a strong stance against Obamacare, he lives in a health care world that most Americans can only dream of, one that has gold-plated health care coverage worth at least $20,000 according to the New York Times.  On top of that, according to the Centre for Economic and Policy Research, the cost of the health insurance is tax deductible, meaning that if the Cruz's are in the highest income bracket, their tax deduction would be more than $8000 annually.  Just in case you are curious, you can get information on the entirety of the compensation and benefits package for Goldman Sachs employees at this link.

Here is a table showing the top five industries that have contributed to Mr. Cruz over the period from 2011 to 2014:

Now, let's go line-by-line through Mr. Cruz's top three donors.

1.) Club for Growth: This is a conservative political action group that promotes public policies that adhere to a fiscally conservative economic agenda.  It was founded in 1999 and claims to be the only organization that is willing to take on any Member of Congress on policies that fail to uphold basic economic conservative principles.  It has over 100,000 members throughout the United States.  Their goals include the repeal of Obamacare, the reduction of income tax rates and replacing the current tax system with a flat tax.  Here is a look at the group's beneficiaries in the 2012 election cycle showing that Mr. Cruz was their second highest recipient:

Of the $4.25 million spent by Club for Growth, Mr. Cruz received 16.6 percent.

2.) Senate Conservatives Fund:  The Senate Conservatives Fund is an independent PAC that is dedicated to electing "true conservatives" to the United States Senate.  Its goal is to get Senators to enact policies that will restore America's greatness through cutting spending and balancing the budget without raising taxes, repealing Obamacare, enforcing immigration laws, banning bailouts and defending the Second Amendment of the Constitution.  It funds itself through individual donations from grassroots donors.  Here is a look at the group's beneficiaries for the 2012 election cycle which also shows that Mr. Cruz was their second highest individual recipient:

You will note that Mr. Cruz received well less than Josh Mandel (R-OH) who received just over $5.23 million.  Despite spending $18.87 million on the Ohio Senate race, Mr. Mandel lost to Sherrod Brown who spend $24.58 million.

3.) Woodforest National Bank:   Woodforest National Bank is a Texas-based bank formed in 1980.  The bank has more than 750 branches in 17 states and is privately owned with nearly one-third of its branches located in Texas.  Here is a look at the bank's beneficiaries for the 2012 election cycle:

Mr. Cruz was their top recipient, receiving $88,000 of the bank's $141,587 contributed to candidates during the 2012 cycle.  In fact, he received just over five times the amount that Republican Presidential candidate Mitt Romney received in 2012.  

Now, let's take a brief look at how much Mr. Cruz spent in 2012 to get elected to the Senate compared to his competition:

Mr. Cruz spent $14.03 million to get elected compared to only $510,439 by his main Democratic competitor, Paul Sadler, who received 40 percent of the vote compared to Mr. Cruz's 57 percent.  Here is a look at Mr. Cruz's current career fundraising efforts and spending from 2011 to 2014:

A total of $13.694 million or 74 percent of the total raised comes from individual contributions and 9 percent comes from PAC contributions.  Only $843,000 or 5 percent of the total comes from self-financing.

Looking through the list of Mr. Cruz's donors, we get a pretty good idea of what his political backers will be expecting of him should he actually manage to pull off a win in November 2016.

And, just in case you've forgotten, here is a screen capture showing Ted Cruz's birth certificate showing that he was quite clearly born in Canada, albeit to American parents:

Friday, March 20, 2015

Wellbore Integrity and Methane - A Crisis in the Making

Updated March 2016

Back in September 2013, I posting this explanation on one of the key potential problems with fracking.  At that time, I did not have access to data regarding the failure of well bores in areas where there has been substantial horizontal drilling and multi-stage fracking on land.  Thanks to researchers at Cornell, we now have some idea about where the potential problems with shale gas may lie.

First, let's review.  Here, quoting from my posting in September, is an explanation of how a well is drilled, completed and where the problems with well bore integrity can crop up.

When the oil industry drills a borehole to depth, as you can imagine, the sides of the borehole are very unstable and rock continually sloughs into the hole, causing all manner of problems.  To alleviate these problems, a long string of hollow steel production casing of varying diameters is run into the hole to the total depth of the well (or somewhere below or at the depth of the producing formation depending on the type of well).  The diameter of this casing is somewhat smaller than the diameter of the borehole; the space between the walls of the borehole and the outside of the production casing is known as the annulus.   Once the casing is in place, cement is pumped down the casing and flows back up the well between the casing and the sides of the borehole through the annulus.  The cement is allowed to harden and tools are run to ensure that the "cement job" is sound.  The purpose of the cement is three-fold; it holds the casing in place, it prevents the fluids used in the well completion operations from flowing to the surface and it prevents fluids from inside the borehole from flowing into the surrounding formations once the well is completed and on production.  For example, if there is a water-bearing formation above the productive zone, the production casing and cement will seal off that formation, preventing the formation water from flowing into the well bore.

Here is a cross sectional diagram comparing a conventional well bore and an unconventional well bore:

One of the key issues that can cause a completed well bore to fail is related to the cement that is used to fix the production casing in place.  In some cases, the when the cement is pumped down the well bore, it fails to displace the drilling mud in the annulus and in some cases, the cement fails after a period of time.  This failure allows the formation fluids including oil, natural gas or water of varying salinity that are under higher pressure because of the weight of the rock that lies on top of them to flow through the annulus to the surface where the pressure is lower.  It is this problem of well bore integrity that results in contamination of near surface groundwater and the atmosphere.

There are two key differences between conventional natural gas production and unconventional or shale gas production:

1.) Shale gas wells require much higher volume fracks than conventional gas wells.

2.) Shale gas wells require far higher well density than conventional gas wells.

These two factors help explain the potential magnitude of the problem with shale gas production.

Let's switch gears for a minute and take a look at a map showing the extent of the Marcellus Shale play both inside and outside of Pennsylvania:

Please note the concentration of Marcellus producing wells in the northeast part of Pennsylvania.

Here is a more detailed map showing the Marcellus shale producing gas wells (in red) in Pennsylvania, again, noting the concentration of Marcellus producers in the northeast part of Pennsylvania:

Now that you have all of that background information, let's look at the study by the Cornell-led research team.  The researchers, Anthony Ingraffea, Martin Wells, Renee Santoro and Seth Shonkoff, examined compliance reports for 41,381 conventional and unconventional (i.e. shale gas) wells in Pennsylvania that were drilled between January 1, 2000 and December 31, 2012.  In total, 32,678 wells were inspected; of these, 26,915 were conventional wells and 5,763 were unconventional.  The majority (92.6 percent) of the unconventional wells were drilled during or after 2009. The objective of their examination was to get complete and accurate statistics of casing and cement impairment, otherwise known as well bore integrity.  Previous studies noted the presence of thermogenic methane which is sourced in deeply buried sediment (i.e as opposed to biogenic methane which is a result of near-surface bacterial activity) in private water wells in Pennsylvania and this study looked to identify the sources of this contaminant.

The authors of the study note that there are many reasons why well bore integrity can fail:

1.) Failed cement barriers because of inappropriate cement density, inadequately cleaned boreholes, premature gelation of cement, excessive fluid loss in the cement, cement shrinking, high permeability in the cement and normal age-related deterioration.

2.) Failed casing because of collapse and corrosion. 

In these cases, fluids can flow from the reservoir at depth to the surface or into aquifers.

In cases where there are leaks that cannot be repaired, Pennsylvania regulations mandate that these wells be permanently plugged and abandoned.  Unfortunately, in many cases, the flow of hydrocarbons and formation waters between zones may still occur, resulting in continued contamination of aquifers and the atmosphere.

Now that we have the necessary background to understand where the problems may lie, let's look at the results of the study.  The authors found the following:

Conventional wells spudded before 2009 had a structural failure rate of between 0.73 percent and 2.08 percent after 2009 in non-northeastern counties of Pennsylvania.  Unconventional wells over the same time periods had a failure rate of 1.49 percent and 1.88 percent.  The differences begin to show up in the Northeast counties of Pennsylvania; in pre-2009 conventional wells, there was a 5.29 percent failure rate and a 2.27 percent failure rate after 2009.  Unconventional wells in the same area had far higher failure rates; unconventional wells spudded before 2009 had a failure rate of 9.84 percent and nonconventional wells spudded after 2009 (over 92 percent of the unconventional wells as noted above) had a failure rate of 9.14 percent.
Wells spudded before 2009 make up 72 percent of the total wells in the study but only 31 percent of the wells with casing/cement integrity problems.  Of the wells drilled in Northeast Pennsylvania after 2009, unconventional wells are four times more likely to have integrity problems than their conventional counterparts.  The northeast counties (which includes Bradford, Cameron, Clinton, Lycoming, Potter, Sullivan, Susquehana, Tioga, Wayne and Wyoming) make up only 11 percent of the 3030 wells spudded over the time frame of the study but make up 54.7 percent of the state's unconventional wells and 88.8 percent of the wells with cement and casing integrity issues.

The authors conclude that there is a 1.6- to 2.7-fold increase in the risk of well integrity problems in unconventional wells versus conventional well types.  The study predicts that in the Northeast counties of Pennsylvania, the cumulative hazard of well casing or cement failure will exceed 40 percent over the next 25 years.  Keeping in mind that cement and casing integrity usually declines as a well ages, their estimates may not be far from wrong.  Given that over a 100 year period, methane is 21 times as potent as a greenhouse gas when compared to carbon dioxide, the impact of well integrity issues in unconventional wells across the United States and around the world could be very significant in the coming years.