Opinion

Felix Salmon

The SEC surrenders to the oil industry

By Felix Salmon
November 20, 2009

What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations? I think we all know the answer to that one. But unbelievably, after such shenanigans contributed enormously to the greatest financial meltdown in living memory, the SEC is now set to allow more or less exactly the same thing in the oil industry.

Otto points to a stunning report by oil consultant Alan von Altendorf which spells it all out. Up until now, oil companies needed to actually prove they had reserves before they reported proven oil reserves. Now, however, the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).

Von Altendorf goes into great detail about how such numbers are useless and meaningless, and how the “proven reserve” rules should probably be tightened, rather than loosened, given the number of enormous write-downs in proven reserves which have taken place across the oil industry in recent years.

So what’s the SEC thinking here? Frankly, it’s not thinking at all: this is just another case of regulatory capture. And a sign that, so far at least, nothing has changed at the unsalvageable and dysfunctional institution.

Comments
10 comments so far | RSS Comments RSS

Felix, if you understand what Regulatory Capture is and how it happens, why do you continue to propose new regulations, and indeed entire regulatory agencies and frameworks, that will inevitably be captured?

Posted by Noah Yetter | Report as abusive
 

Grrr.

And Noah Yetter…..did you read your post? It does not make sense, friend. So if we replace the SEC, corruption and lack of balls at the new aganecy will continue? Did I get that right?

Posted by kthomas | Report as abusive
 

We now have the ability to vet properly, but how do we choose the vetters? Watching the watchers, vetting the vetters… where does it end?

http://www.cbsnews.com/stories/2008/12/3 1/60minutes/main4694713.shtml

 

Uncle Billy,

It doesn\’t end. That\’s the conundrum. Only perfect regulation that can anticipate and proactively defuse potential regulatory arbitrage will work.

Given that achieving perfect regulation is futile, the best approach to regulatory reform is devising imperfect regs (which is a given)that requires robust , timely and public disclosure as requirement number one.

The blogosphere is already equipped and anxious to analyze and broadcast the sausage making processes details.

Sunshine may not be the perfect disinfectant, but it is , like capitalism, the least bad (and extremely powerful) tool in the toolbox.

I recall Felix\’s article after Madoff, calling on bloggers to step up to provide the Markof\’s a platform. Soon afterward, Stanford was exposed. I don\’t know if I can connect the dots from Stanford to Felix, but the blogs are always trolling the disclosure information available. Imagine what they would broadcast with more robust information.

Throw them some more meat, with better disclosure regs, and we\’ll get a better financial system out of it. As it stands now, we\’re depending on the same captured government officials who created this mess to come up with the cure. They\’ll get away with it if we don\’t demand more information as a guide to better regulation.

Posted by MichaelC | Report as abusive
 

Small point (and highly nerdy):the way you use the phrase ‘monte-carlo simulation’ isn’t – in fact can’t be – correct. Monte-carlo simuation is a tool – in this case for integrating certain types of high-dimensional functions. In particular, it is often used to integrate probabilistic models when no analytic solution is available.

But it is not possible to discredit the idea of a ‘monte-carlo simulation’, any more than it is possible to discredit arithmetic, or linear algebra. A Monte-carlo simulation does not say anything about the world. It says something (‘true’ if properly done) about a formal object, which someone might then claim is in turn a true, or at least an accurate representation of the world (that is where the problem was). But the truth, accuracy or falsity of the models has nothing to do with whether you use MC to analyse them.

Posted by sean Matthews | Report as abusive
 

Matthews made a very good point.

Posted by IF | Report as abusive
 

So is the issue here about representations oil companies make to investors about the amount of oil reserves they have? And we’re supposed to care about people who buy shares of oil companies? I don’t. We shouldn’t be encouraging anybody to continue to invest in obsolete energy technology, anyway. The SEC has more important things to worry about, so they should let the oil companies say whatever they want about their reserves.

 

We are entering into peak oil. Governments do not want panic and oil corporations want money.

It was reported today that FIFTY oil tankers parked outside of the UK waiting for the price of oil to go up (or perhaps a national emergency…?) and in September, it was reported that there are too many to count anchored East of Singapore

So there is abundant supply of oil but little demand, which is way down because of the economy. Doesn’t a relationship exist between supply and demand and prices anymore?

The only variable left is the value of the USD. Does the current value of the USD justify a price of $80/bbl? China, the largest single holder of our debt, has been increasingly vocal about getting away from the USD to a “basket of currencies.” Several OPEC nations are scheduled to put together a currency of their own to price oil in, instead of the USD oil’s always been priced in.

It’s like watching a house of cards come down in slow motion. Great job, boomers.

Posted by nygenxer | Report as abusive
 

wait a sec, nygenxer, a lot of the geniuses who created the CDOs and CDSs, and bought into the whole cheap credit fiasco are younger than 45, so that would place them out of the boomer generation (in the x and y category). The boomers did a lot of bad things (starting with the election of Saint Ronnie), but don’t lay this entirely on us.

$80 today is like $67 in July (when compared to euros), and I don’t think that’s unreasonable.

China should move away from the dollar, but they would have to float the renminbi, and if they did that, not only would American exports be cheaper, but their exports, which got cheaper everywhere else over the last five months (because they are tied to the dollar), would get more expensive. China wants to have its cake and eat it, too, so they whine about the cheap dollar while doing everything they can to remain dependent on our market.

 

Are you implying that you actually believed any of the reported reserve numbers in the first place?

“…the SEC is allowing them to use internal, proprietary computer models to essentially pull their “proven reserve” numbers out of thin air (or the nearest friendly Monte Carlo simulation).”

Hasn’t OPEC done this since, uh, always?

 

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