LONDON (Reuters) – If any organization has the incentive and the scale to roll out a fleet of alternative vehicles, it should be the United States Postal Service (USPS).

The post office operates the largest civilian vehicle fleet in the world, with more than 210,000 vehicles travelling almost 1.3 billion miles a year.

The agency has a powerful reason to switch from expensive petroleum-derived fuels as rising fuel costs make a small but significant contribution to its mounting financial problems.

Its struggles to find cost-effective alternatives, however, highlight the obstacles to rolling out alternative vehicle technologies across the United States.

RISING FUEL BILLS

In fiscal year 2011 (FY2011), the 12 months from October 2010 to September 2011, the postal service made a net loss of $5.1 billion. It would have been even worse if the agency had not deferred making retirement-linked payments to the U.S. Treasury.

Losses are being driven mostly by employment costs, including legislative requirements that mandate pre-funding of retiree health plans. Workers compensation, benefits and retirement funding account for 75 to 80 percent of total operating expenses, compared with under 10 percent for transportation and fuel. Nonetheless, the rising prices of gasoline and diesel contribute to the agency’s woes.

LONDON, May 25 (Reuters) – Widespread use of alternative motor fuels has been hampered by lack of fuel distribution infrastructure, despite strongly favourable economics for alternatives to gasoline and diesel, and a range of financial incentives offered by U.S. federal and state governments.

The U.S. federal government’s commitment to alternatives, coupled with renewed interest among large commercial fleet operators, encouraged by the big spread between cheap natural gas prices and the high cost of petroleum-derived fuels, could provide the critical mass of demand to support the roll out of a nationwide alternative fuel system.

But effectiveness will be maximised only if federal agencies and private fleet operators settle on a relatively limited number of alternative technologies, at least in particular areas, rather than fragment their consuming power across the full range country wide. Early indications are not hopeful.

ALTERNATIVE FUELLED VEHICLES

Federal law defines alternative fuel vehicles broadly to include both those running on alternative fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen and high blend ethanol (E85) as well as certain qualifying hybrid electric vehicles run on a combination of regular petroleum and electricity (42 USC 13211).

In 2010, there were nearly 1 million vehicles running on alternative fuels in use across the United States, according to the Department of Energy’s Alternative Fuels and Advanced Vehicles Data Center, up from less than 400,000 a decade earlier. In addition, more than 2 million hybrid electric vehicles had been sold over the same period.

Alternative fuelled vehicles are still a tiny minority of vehicles on U.S. roads, but the number is increasingly rapidly. The problem is that few are actually filling up with alternatives to gasoline owing to the lack of outlets actually selling alternative fuels such as E85 or LNG.

LONDON, May 25 (Reuters) – Widespread use of alternative motor fuels has been hampered by lack of fuel distribution infrastructure, despite strongly favourable economics for alternatives to gasoline and diesel, and a range of financial incentives offered by U.S. federal and state governments.

The U.S. federal government’s commitment to alternatives, coupled with renewed interest among large commercial fleet operators, encouraged by the big spread between cheap natural gas prices and the high cost of petroleum-derived fuels, could provide the critical mass of demand to support the roll out of a nationwide alternative fuel system.

But effectiveness will be maximised only if federal agencies and private fleet operators settle on a relatively limited number of alternative technologies, at least in particular areas, rather than fragment their consuming power across the full range country wide. Early indications are not hopeful.

ALTERNATIVE FUELLED VEHICLES

Federal law defines alternative fuel vehicles broadly to include both those running on alternative fuels such as compressed natural gas (CNG), liquefied natural gas (LNG), hydrogen and high blend ethanol (E85) as well as certain qualifying hybrid electric vehicles run on a combination of regular petroleum and electricity (42 USC 13211).

In 2010, there were nearly 1 million vehicles running on alternative fuels in use across the United States, according to the Department of Energy’s Alternative Fuels and Advanced Vehicles Data Center, up from less than 400,000 a decade earlier. In addition, more than 2 million hybrid electric vehicles had been sold over the same period.

Alternative fuelled vehicles are still a tiny minority of vehicles on U.S. roads, but the number is increasingly rapidly. The problem is that few are actually filling up with alternatives to gasoline owing to the lack of outlets actually selling alternative fuels such as E85 or LNG.

LONDON (Reuters) – Proponents of clean energy often portray the sector as a plucky little David locked in battle with the fossil fuel industry’s big bad Goliath for taxpayer support.

In the United States, President Barack Obama has tapped into this theme to push for an end to tax relief and other subsidies for oil and gas production, and an extension of federal support for renewable energy and energy efficiency initiatives.

Speaking in his state of the union address to Congress in January, the president claimed “We’ve subsidized oil companies for a century. That’s long enough. It’s time to end the taxpayer giveaways to an industry that rarely has been more profitable and double-down on a clean energy industry that never has been more promising.”

But the rhetoric obscures an unprecedented push to cut energy consumption and increase the share of renewable energy generation underway at all levels of government as well as in the private sector. Federal, state and local governments, coupled with local power and gas utilities, are pouring billions of dollars a year into a vast range of initiatives to boost efficiency and renewables.

Support for efficiency and renewables is split across thousands of different programs which has tended to hide the scale of the overall effort. As a result, many energy analysts fail to appreciate the scale of the shift underway. However, the sheer amount of support being given to clean technology and energy efficiency programs suggests a revolutionary transformation of the energy system will likely occur in the next two decades.

PROGRAMME PROFUSION

In 2010/11, the federal government alone had 679 separate renewable energy initiatives spread across 23 departments and agencies, according to a report prepared for Congress by the Government Accountability Office (GAO) (“Renewable Energy: Federal Agencies Implement Hundreds of Initiatives” Feb 2012).

LONDON, May 21 (Reuters) – Under intense pressure from the banking industry, U.S. regulators have already proposed a very generous interpretation of the Volcker Rule prohibition on proprietary trading which contains broadly drafted and ill-defined exemptions for hedging including portfolio hedging.

But even that was not enough for JPMorgan Chase and Co . The extent of the bank’s hostility to restrictions on its use of portfolio hedging and asset-liability management is laid bare in a letter from Barry Zubrow, newly-installed executive vice president for corporate and regulatory affairs, to the Federal Reserve and other agencies on February 13.

In it, the bank dismissed the proposed regulation implementing the Volcker Rule as “too narrow” and urged regulators not to “hard code” the requirements for claiming a hedging exemption. Instead the bank wanted them relegated to an appendix, where regulators would merely take them into account as part of the general supervisory process.

The letter provides a fascinating insight into the interaction between the bank and regulators as JPMorgan fought to prevent curbs on its portfolio hedging. But more important, it provides a useful insight into how far the bank wants to stretch the concept to embrace a much wider and ambitious set of transactions with significantly more risk attached to them.

WHAT THE LAW SAYS

For all its famed length, the Dodd-Frank Act took less than 100 words to spark a furious debate about how to distinguish between proprietary trades, which are forbidden, from hedges, which are allowed.

The law simply states “a banking entity shall not engage in proprietary trading.” But it goes on to create an exemption for “risk-mitigating hedging activities in connection with and related to individual or aggregated positions, contracts, or other holdings of a banking entity that are designed to reduce the specific risks to the banking entity in connection with and related to such positions, contracts, or other holdings” (12 USC 1851(a)(1)(A) and 12 USC 1851(d)(1)(C)).

LONDON, May 18 (Reuters) – Former Kansas City Fed President Thomas Hoenig suggested banks that are too big to fail are also too big to exist, and should be broken up (“Financial reform: post-crisis?” Feb 23, 2011).

But are banks that are too big to fail also too big to trade and too big to manage properly?

JPMorgan Chase & Co’s reported hedging losses suggest the bank, famed for a disciplined approach to measuring and managing risk, is struggling to cope with increased demands of scale, after swallowing up a string of other institutions in the last decade.

Massive hedging losses by the bank’s Chief Investment Office are the second time in under two years JPMorgan has been forced to own up when a big trade went wrong and the bank struggled to extricate itself because of the size of its positions.

In 2010, the bank lost several hundred million dollars on coal trades. Blythe Masters, the head of the bank’s commodity trading division, owned up to a “rookie error” when the bank’s management and risk oversight functions failed to prevent a large position that overwhelmed the liquidity available in the thinly traded coal market, and proved expensive to exit.

Now Chief Executive Jamie Dimon has issued a similar apology for big loss-making positions at the Chief Investment Office. “In hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored,” he told a conference call on May 10.

HUBRIS AND COMPLACENCY

LONDON, May 17 (Reuters) – JP Morgan’s reported loss on a “hedge” highlights the way the concept has been stretched in the last two decades to cover a broader range of transactions than before, many of which have little to do with the traditional concept of offsetting underlying price risks with like-for-like derivative positions.

It should stiffen the resolve of regulators to define hedging more narrowly in future when deciding whether positions should qualify for special relief under banking and derivatives laws — and ignore special pleading from banks, lobbyists and derivatives lawyers to continue stretching the term to give privileged treatment to an ever-wider range of transactions.

If institutions wish to continue portfolio hedging for commercial reasons, they should remain free to do so, but without any special favours from the regulatory system.

SPECIAL TREATMENT

In general, U.S. law treats derivatives positions established for hedging more favourably than those which are speculative in character. Preferential treatment for hedging transactions has been evident in every major piece of derivatives legislation from the original 1922 Grain Futures Act to the 2010 Dodd-Frank Act.

Hedges get more favourable treatment on everything from position limits to margining, capital requirements and position reporting. Underlying this separate and unequal treatment is an assumption that hedges are more socially useful than purely speculative positions.

U.S. law explicitly encourages hedging. For example, Title 7 of the U.S. Code contains “Special procedures to encourage and facilitate bona fide hedging by agricultural producers” (7 USC 6q).

LONDON, May 16 (Reuters) – Governor Mervyn King has finally admitted that the Bank of England can no longer accurately forecast inflation, as the tremendous amount of uncertainty renders the quantitative forecasting techniques employed before 2007 obsolete.

“The difficulty of predicting the precise impact of these influences means that the (Monetary Policy Committee) places more weight on the broad shape of the inflation outlook than its exact calibration,” a subdued governor confessed at a news conference to present the latest revisions to the bank’s inflation fan charts.

King urged a more qualitative assessment of the risks to inflation and growth. While insisting the committee’s decisions about interest rates and quantitative easing are still guided by the inflation outlook, he urged his listeners to focus on the bigger picture.

“Rather than focusing on quarter-to-quarter movements in output or inflation which are impossible to predict, the MPC focuses on the bigger picture,” King said. “That bigger picture is of a gradual recovery in output and of subdued domestic cost pressures, meaning that inflation is likely to fall back as external influences fade.”

It ends a long period when the bank tried to justify all its immediate policy choices through the twists and turns of the fan charts, which proved about as accurate as a fortune teller’s crystal ball.

WHERE DID THE SLACK GO?

Unfortunately the bigger picture is more gloomy than the governor and his colleagues thought only six or twelve months ago.

LONDON, May 16 (Reuters) – U.S. crude futures have been offered aggressively lower over the last fortnight as the market scents distress and hunts for the last remaining traders trapped on the losing side of a Brent/WTI arbitrage that has gone spectacularly wrong.

For months, prominent oil analysts have been sharply divided about whether the reversal of the Seaway pipeline from Cushing in the U.S. midcontinent to Houston on the Gulf Coast would be enough to cure the glut of crude which has built up in the central United States, pushing U.S. crude futures to a record discount against the international marker Brent.

Back in February, Goldman Sachs warned “with the Seaway flowing crude from Cushing to the U.S. Gulf Coast, we expect WTI prices to be closely tied to Brent prices, with WTI likely trading at a $3-5 per barrel discount, reflecting the pipeline tariff economics.”

By the end of summer, Goldman predicted the discount for WTI would narrow to $5, down from more than $11 in late February (“Repositioning our trade recommendation as Brent crosses $120/bbl” Feb 22).

In contrast, the research team at Barclays told Reuters reporters recently “Our view is that Seaway’s reversal does not make much of a difference to Midwest balances.”

“Domestic production growth and Canadian flows are likely to dwarf (Seaway’s) 150,000 barrel per day takeaway capacity,” according to Barclays analyst Amrita Sen.

MANY FUNDS MAKE A WHALE

LONDON, May 14 (Reuters) – The collapse in oil prices since the start of May is posing a severe test for oil market bulls who must meet big margin calls to maintain their positions — or close them out and accept their losses.

On February 22, the highly respected research team at Goldman Sachs recommended a long position in September 2012 WTI futures, then valued at $107.55 but now down more than $12 per barrel to a low of just $94.70 in trading earlier on Monday.

Goldman was the top oil price-forecaster in 2011. But it was in good company earlier this year in predicting a revival in WTI prices. Bullishness towards crude, especially WTI, was common around the market, even as the price surged above $120 per barrel and economists began to warn about potential risks to the recovery.

By the time Goldman issued its recommendation, hedge funds and other money managers had amassed a near-record long position in WTI-linked futures and options, equivalent to 300 million barrels of crude.

While Goldman analysts continued to see more upside potential in both Brent and WTI, they recommended exposure to discounted WTI in the expectation that the price gap would narrow and provide a bigger boost to U.S. light sweet crude futures (“Global Energy Weekly: Repositioning our trade recommendation as Brent crosses $120/bbl” Feb 22).

However, the imminent reversal of the Seaway pipeline has failed to narrow the spread. September 2012 WTI is actually trading at an even bigger discount ($13 per barrel) compared with when Goldman first issued its trading recommendation ($11). In the meantime, September Brent prices have fallen $10 per barrel.

The result is that long WTI futures positions like Goldman’s are now doubly underwater (Charts 1-2).