Last night for my Business and its Environment class I watched The Smartest Guys in the Room
, a documentary about the rise and fall of Enron. The documentary was just OK -- they kept using unnecessary music backing, and had this whole bit about one executive's fondness for strip clubs that was totally unnecessary -- but it was still fascinating. It really stuck in my head, I had dreams about using mark-to-market accounting to create millions in imaginary profits.
And then this morning I wake up and see this headline on the front page of LATimes.com: Manipulation of California energy market gives consumers a jolt
. JPMorgan Chase is being accused of using loopholes in California's energy market to score $100 - $200 million. Cute. And the best part is that if they had just taken LESS profit, they most likely wouldn't have been caught.
Energy markets... I have trouble wrapping my brain around them. I mean I understand bidding on electricity based on supply and demand, but in the end when it comes down to the consumer level 1) There's really no alternative and 2) The average consumer has no idea how much he's using. So if demand spikes and supply declines, price spikes and local providers either take a bath or pass on the costs to surprised and unhappy consumers, right? I'm trying to think what other commodity is handled this way... natural gas, I guess? Water?
(And also -- wtf was up with Enron's plan for a bandwidth marketplace? I can't grok that at ALL. Bandwidth isn't like electricity, you can't re-route it off one pipe to another, it IS the pipe. Obviously I'm oversimplifying but I still don't get it.)
Anyways speaking of natural gas, the latest Economist has a special report on just that topic. And oh, again with the global marketplace. OK, so a lot of European providers have long-term contracts with Gazprom, the Russian natural gas behemoth, to buy natural gas at rates that are pegged to oil. Which made sense at some point in the past, but is looking pretty insane now as oil is at $100/barrel and natural gas is plummeting in a lot of markets thanks to shale gas. So anyways, meanwhile America starts thinking that the local demand for gas is going to start outstripping the supply, so we build a bunch of LNG receiving facilities and Middle Eastern countries build LNG exporting facilities. Then we figure out fracking and BAM we've got more natural gas than we know what to do with. So the Middle East has these LNG tankers with nowhere to go. They send them to Europe, and the providers that aren't locked in to the Gazprom contracts snap the LNG up for way cheaper than the oil-pegged price. Now the guys who DO have Gazprom contracts are just hosed because they're locked in to buying the stuff at prices way higher than their competitors. Good times.
Here's the thing though: Gazprom recognized the problem and is renegotiating the contracts because they recognize that making less money is a better option than having their clients go out of business. This is sort of like OPEC... OPEC can spike oil prices basically whenever they want, but they recognize that doing so could push the world into recession, driving down the demand.
Compare to Enron, who just TOOK and TOOK and TOOK from the California electricity market despite causing rolling blackouts and massive harm to local providers and consumers.
Anyways. Done with this class as of Friday. Then I get about six weeks off, and the day after Labor Day I start my last two classes. Come February I WILL BE A MASTER. (Of business administration.)