Can oil companies succeed in the new energy competition?

The British oil company, BP, is reported to invest 20 million dollars in an Israeli developer of ultra-fast-charging batteries. Though 20 million dollar investment is comparable with its multibillion investment in oil and gas each year, it shows that the oil company is trying to find a new path for its future business. However, what is the chance for BP, or other oil companies, to succeed in the new energy competition?

Electric vehicles are not new and many auto companies have already released their electric vehicles to the market, Tesla may be one of the most famous electric vehicle developers. The current issue for electric vehicles competing for their market share in the auto market is people do not have convenient access to the power (charger). There is no single provider to provide a general solution for this problem, then this is a market with potential. BP is such company which wants to win this opportunity in the auto industry.

BP has its advantage that it can use its stations to provide chargers for electric vehicles. Then if BP has an efficient solution for electric vehicles' energy supply, it can win the market quickly and easily via its existing power network. However, BP's biggest weakness is it is too big. BP generates its majority of revenues in its oil and gas business. If BP decides to move to the electric vehicle business, it means it has to give up some of its revenues in its petrol business, which could be really painful for its early stage of transformation and be attacked by its shareholders, this might be the reason that why BP has only invested 20 million dollars in this ultra-fast-charging battery developer.

Overall, I think that oil companies like BP cannot be the leader in the new energy competition, since they are too big to be flexible and they cannot give up the huge profits from their petrol business lying ahead of them.

From politics to economics

The Italian election has shaken the Italian financial market. The Italian bond yield has increased to a historical peak and the Italian central bank has warned that the current populist government will let the market question and even lower the credibility of the government. We can see from the Italian election that the influence of politics, especially the expected government policies in the future, shape its financial market.

It is undoubted that politics has significant influence on economics as well as the financial market. Firstly, politics determine the central government fiscal policies as well as the central bank monetary policies. These policies can have influence on the economy as well as the financial market. Secondly, politics will determine the regulation rules. Sometimes the policies including government expenditures do not have very significant influence on the financial market and the economy because the expenditures may have temporary impacts rather than permanent impacts; however, regulations will always be there unless they are changed by the government. Therefore, such influence is more permanent. Thirdly, politics will have influence on the individuals including individual people and individual groups (companies, organizations and etc.) and such influence will affect individuals' investment and consumption strategies and preferences, leading to impacts on the economy as well as the financial market.

Politics is so important that it continues to influence our life including our economy and future incomes.

European Crisis?

The famous or infamous financial giant, George Soros, warned on Tuesday that there would be a major political and financial crisis facing Europe. He pointed out three sources of crisis: the refugee crisis, Brexit and an austerity policy. His worry is reasonable. The refugee crisis has increased the popularity of nationalism, populism and other right-wing groups across Europe, this has been proved multiple times by the French election, the Italian election more significantly. Brexit is another important issue, as Britain is a large economy in the circle of Europe and the financial centre of Europe, and even can be seen as one of the important bridges between Europe and the US. Once Britain leaves the European Union, it will definitely bring economic impacts to the European economy; moreover, it may set an example for other European countries which have the willingness to leave the European Union that the current Italy is being questioned if it is going to leave the Eurozone as well as the European Union. The austerity policy has been imposed since the Financial crisis in the hope of bringing back sustainable government expenditures for the European countries which have high national debt levels. However, the austerity policy can hardly stimulate and expand these countries’ economies, since there is almost no fuel to push these economies forward.

These threats that Soros mentioned are real, and it seems that such crisis cannot be avoided because current Europe no longer unite together and is deeply divided when the populists gain their market in the European politics.

The control over banks

When it becomes clearer that the EU will not allow the UK to seek special access to the single market for its banking industry, the Treasury and the Bank of England are divided over the issue surrounding the City. The Treasury seems willing to give up some of the regulatory power over the City in order to seek for the access to the single market for the banking sector, while the Bank of England seems unwilling to give up its regulatory autonomy. Here comes a question which state will benefit the City more.

For the City, it is its best interest to gain the access to the European single market and it does not care too much about who will become its regulator in the future, as regulation happens anyway. Therefore, the City will support the Treasury to gain its access to Europe. However, if the UK loses its regulatory power over the City, then the City literally becomes part of the European market, and probably the European Central Bank becomes the new regulator. For the Bank of England, this will largely weaken its ability of stabilizing the UK economy over the long term, though it is hard to say whether the Bank of England or the European Central Bank is better at stabilizing the economy and regulating the financial industry. However, for the UK economy itself, it becomes harder to be stabilized when the ECB takes over the role of the BoE as the UK banking sector regulator, as the ECB has to consider the entire European banking industry rather than just the City, the regulations under the ECB are much less specifically targeted for the City.

To conclude, my opinion is that the City will welcome the Treasury’s plan as it gives a greater chance to gain the access to the European single market, but its plan is likely to affect the stabilization of the UK economy over the long term as it loses the regulatory autonomy over the banking sector.

Private Space Industry

The US President has ordered to cut red tapes for the private space industry in order to lead the industry ahead of China and European countries. Regulation can stabilize an industry’s development and avoid it from being too wild; however, it can slow down the speed of development and limit people’s innovation and creativity as well as the competition in the sector. By deregulating the private space industry, Trump hopes it can speed up the development and innovation in this sector. 

Many countries see the opportunities in the private space industry as they believe that the sharp reduction in the costs of launching rockets can help the “colonisation” of the space seem more achievable. People have different opinions about the future of the private space industry. Some people believe that space travel would become the new tourism industry that provide luxury and special trips for the super wealthy people. Some people believe that the private space industry is the “colonisation” industry that it helps people to move to other planets (SpaceX is a company that holds such view). Along with the idea of “colonisation”, some people say the space as a massive mine that will provide our human beings with countless natural resources. Some people do not think that the private space industry is not about migrating to other planets, they think that send more facilities to the space and provide convenience on the earth, for example, they can send more satellites to provide more accurate GPS service as well as direct driverless cars.  Everything is possible. 

However, I think that the private space industry should keep its goal simple, its major business is transportation that it sends humans as well as goods to the space. Its major goal is to reduce the costs of space transportation and the idea of how to take advantage of the low space transportation cost is the jobs of other industries as well as the new industries that are developed based on the idea of how to use the space. It is not important to know what we can do with the space; once we can have cheap ways to send humans and goods to the space, people are creative enough to figure out the best use of the space and I think this is not the issue that we need to worry about right now.

The happiness of winning

People love winning; no matter of what they win, they will feel of some degree of happiness. In auctions, winning means placing the highest bid. As long as people are willing to pay for their happiness, they are willing to pay the amount above their actual rational valuations just in order to get that extra happiness of win.

Then this leads to a problem that if there exists winner’s curse in auctions with solely independent private values. It is commonly agreed that in auctions with common values, there exists winner’s curse, because people value the objects based on not only their individual values but also others’. However, if people love to pay for their extra happiness of win, then the winners will pay the amounts that are above their initial valuations particularly in English auctions, as their initial evaluations do not consider of the temporary happiness gained from winning the auctions.

If we can actually find evidence that the winners of auctions (with merely independent private values) pay the prices that are higher than their initial evaluations before participating in auctions (this could be done by surveys asking people’s valuations before their entering auctions or changing the formats of auctions, people may feel stronger about win in English auctions than in sealed auctions), we may be able to conclude in any kind of auction there exists winner's curse.

What can we learn from Turkey's Lira recent volatility?

 

Turkey's currency, Lira, is experiencing a period of high volatility in the Forex market. Earlier this week, the market sold off Lira due to the coming Turkish Presidential and Parliamentary elections. However, the market only started to take more active activities after rating agency warnings. This might imply that investors make their decisions largely depending on the information provided by rating agencies rather than their individual judgment. The investors in the Forex market can mimic other activities and the rating agencies can mimic others' ratings; when the two herding effect activities take place at the same time, the effects will be piled up and multiplied to generate an incredible result. It easier for people to mimic the actions of their group than to mimic the actions of the people who do not belong to their group. This could explain why Turkey's Lira hit the historical low even when the elections have not created any certain effects on the Turkish economy yet.

After the Turkish central bank announced an increase of the key lending rate from 13.5% to 16.5%, Lira appreciates sharply due to the market rally. This can be explained by the action of the central bank, since when the base rate increases, the exchange rate tends to increase (appreciate). However, it also can be seen as a market correction which is sparked by the central bank rate hike.

The latest appreciation of Lira is not a surprise; however, we may see the earlier depreciation of Lira was a result of coincidence (or luck). This may suggest that the market correction to overreaction (underreaction) take places with almost certainty, while the surprise is purely a result of luck (collusion of multiple parties).