Tesco and many other retailers create points which they will redeem in payment for goods etc. UK retailers also club together and redeem quasi currency 'points' eg the staggeringly worthless Nectar points. Boots the Chemist is noted for the best scheme in the UK in terms of value.
Airlines are prepared to accept Air Miles in payment for air travel.
Why then, should not an association of gas producers - a Gas OPEC - agree to mutually accept in payment for gas Units which they issue? These would be issued to members of an association of gas users, which would be another stakeholder member in the gas Clearing Union. The Units would be redeemable in payment for gas supplied through what is essentially a global virtual Gas 'Pool'.
Just to be clear, since you were under a misapprehension the last time we discussed this, Units - unlike forwards/futures contracts - give no right to delivery.
So Qatargas might issue a few billion Units and sell them to (say) the Chinese or Japanese as an alternative to T Bills, and they could use the proceeds to repay the interest-bearing debt in fiat money they have incurred, replacing it with an energy debt.
Qatargas gets rid of the interest burden: against that, they lose the upside on the value of gas sold forward but also protect against the downside. ie its a hedge - 100% margined, and undated. It also happens to be a Sharia'h compliant financing mechanism at a fundamental level, as opposed to the sophistry described as "Islamic" finance, but almost invariably an Islamic veneer on an unIslamic reality.
For Unit purchasers it is a hedge against gas price inflation. It would be a perfect investment for those people currently investing in natural gas through Exchange Traded Funds (ETFs) which invest in gas through futures contracts, and are royally screwed by the trading community generally, and the investment banks in particular.
For investors though, the Unit price will be underpinned by gas consumers, who would buy Units and use them instead of fiat currency should the Unit price fall sufficiently below the physical 'spot' market price. Long term supply contracts may then evolve into long term supply partnership arrangements between infrastructure service providers.
'Unitisation' completely changes the financing mechanism and divorces the securing of price from the securing of supply. There will still be a need for a rolling pool of development credit, and the services of experts like your good self for project appraisal etc, but once projects are complete, they would be refinanced by long term investors in Units in search of an alternative to the dollar.
So IMHO the sooner a gas clearing union is created, and unitisation implemented, the better for all of us.
Consuming nations may then agree to apply 'carbon levies' to crank up the physical market price, thereby cutting back use. Units would be issued as an energy dividend which consumers may use in payment, but would be more likely to save, if they could, and exchange for other value, like rent, food, and goods.
In particular the staggering wastage and subsidies by producer nations could be eliminated by raising physical gas prices to global market levels and compensating citizens with Units which theycould use or save. The proceeds which result would then finance direct 'energy loan' investment in renewable energy and energy savings.
Who needs deficit-based carbon credits other than the middlemen who brought us the Credit Crunch? "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Long Term Top contracts allow the both parties the certainty to make investments based on a guaranteed cost for one side and revenue stream for the other. In the Oil and Gas and Chemical Industries, it is a standard procedure which works to the benefit of both buyer and seller.
When one party unilaterally fails to meet its obligation - either to supply or to purchase, both parties end up losing. A Prime example of this is when El Paso LNG Co reneged on its TOP's with Algeria's Sonatrach in 1980 due to a linkage between the LNG price and Oil. The result is that El Paso had to write off $900 mm of tankers, and went into Chapter 11, and ended up being bought by Rail road company Burlington Northern, and Sonatrach had at that the time the world's largest LNG plant working at under 50% capacity.
The reason was not because they entered into a TOP, but that the guys who negotiated did a piss poor job of understanding the dynamics and risks of their markets.
But the point is that you are looking, as is Jerome I suspect, for complexity that is not there. A Unit redeemable in payment for gas supplied is so simple it's almost embarrassing. It is entirely agnostic as to the supply, provided the supplier is a member of the clearing union.
See my answer to Jerome. Sure, we need a clearing system: this would be an International Energy Clearing Union. Exchanges of energy-as-currency (ie Units) would take place on credit terms, with debit balances subject to a mutual guarantee and supported by both those with positive and negative energy balances.
We will still have supply agreements, and we will still have a physical market price which varies with supply and demand for gas.
But Units are not about supply, but payment in respect of the agreed transaction.
Unitisation is capable of changing energy financing totally. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
- Jake If you only spend 20 minutes of the rest of your life on economics, go spend them here.
Electronic scrip, based upon the use value of:
(a) location - replacing mortgages; and
(b) energy;
is what is needed, and would circulate on a WIR style credit clearing / accounting system, within a suitable framework of trust.
"Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
This is what caused the so called sub prime crisis.
For example - for every 100 airmiles that , say only 80 are redeemed. But since you are short of cash, you decide to trade your liability for 75cts on the dollar, and in this way you strengthen your balance sheet - you remove $1 dollar of debt for 75cts payment,
The buyer, is betting that he can reduce that 80% to below 75%, or alternatively can push back the payout so that the discounted value is less than the face value
Then lets say the buyer also picks up Lufthansa Miles'n more, Emirates Skymiles, Delta whatever, and then bundles them all into a package, which he splits four ways into four separate securities, each of which he sells on the market.
And what you have is a classic derivatives market.
And the fact is, what you propose already exists in current contracts: LNG tankers can be diverted to other markets, if the spot price is more favorable than the pre-agreed formula under the long term contract, with a pre-agreed profit sharing mechanism between the parties. No need for your units to do that. In the long run, we're all dead. John Maynard Keynes
For those countries that are geographically and geopolitically distant from their markets, LNG is the only way to go. But if you have direct land access as Russia does with the EU, then pipelines are cheaper and more reliable.
The gas market is analogous with the electricity market, where an end supplying utility needs a palette of supply sources, and profits are maximised by playing with the sources, and marginal costs. However like electricity, there is a baseline demand which has to be met everyday, and some kind of stability of cost and supply is neccessary for this base.
Oil tankers change hands often; LNG, none or once would be my bet. But maybe I'm wrong. In the long run, we're all dead. John Maynard Keynes
Transactions in oil cargoes are much more common, but a couple of times would probably be the most, since the logistics of taking over the charter and diverting a tanker in transit are pretty horrendous.
A tanker operating as floating storage for a cargo is a different matter, but even so, multiple sales would be pretty rare. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The tanker load of LNG requires to be paid for.
You may pay with 50 million fiat Fed dollars, or in x million Units which this producer, or any other producer member in the gas clearing union, issued earlier in exchange for something of value to them, and which you bought because it was advantageous to do so.
Sure you'd need a framework of trust, and a custodian, and maybe provisions into a default fund. But that's not rocket science - just clearing of energy debit balances and credit balances without an unnecessary central counterparty aka single point of failure.
If you can understand Air Miles, then it surprises me that you do not understand Units.
Kilo Watt Cards are an example of a proof of concept created by someone in the US just to show that it works in practice.
Deficit-based money created as debt, and a market operated with intermediaries "for profit" are the problem - not the solution.
Producers get interest-free loans denominated in energy. Consumers like China and Japan, and investors wishing to hedge energy inflation would buy the Units in preference to T Bills paying 0%.
Hey Presto. You've got the beginnings of a global reserve currency, plus an energy standard for pricing of global transactions. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Why be stuck with a unit that's less liquid and less practical than the real stuff?
The only reason airlines give airmiles is to be able to give them to the passengers rather than to their employers who pay for the plane tickets. If they gave money, it would not go to the "right" hands (ie those that are able to choice of airline, ie people who get to spend someone else's money to travel and will influence that decision in ways that can be advantageous to them). I'm not sure that's really what you have in mind: airmiles are principal/agent arbitrage instruments... In the long run, we're all dead. John Maynard Keynes
I would suggest that if the gas producers - led by Russia, Iran and Qatar - were to announce they (or their pet companies) were issuing such Units, and would honour redemptions of each others' Units, then China, Japan,and others would pretty quickly be dipping their toe in the water and buying them..... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Russia has a history of currency manipulation, confiscation and destruction. The others are no better. In the long run, we're all dead. John Maynard Keynes
Balances in Units would be positive and negative, as with any other global currency, and the clearing union would require a framework of trust. Here, I recommend a Guarantee Society approach, not a central counterparty.
So holders of positive balances and holders of negative balances would both pay a guarantee charge in relation to the mutual guarantee into a default pool held by a credible custodian - possibly Swiss.
The analogy with Keynes' Bancor and International Clearing union is close, the difference being that there would be no central issuer, and the currency Unit would be redeemable for the intrinsic energy value of gas.
Russia, Qatar and Iran would all have far too much to gain from such an approach - compared to the financial costs and restrictions of the current system - than to fuck it up.
I note you are frequently at pains to point out how reliable Russia has been in supplying gas over the last 40 years. I doubt whether they would default in the way you appear to think, but we would require a framework of trust just in case they were tempted. As Stalin said: Trust, but Validate.
And if the three biggest producers are in, everyone would be in, I suggest.
China and Russia are already looking to settle bilaterally in Renmimbi and Roubles. We all know that the minute the rates diverge one way or another too painfully, one or the other will default.
Unitisation transcends that, and China would be only too pleased to be able to pay any other gas supplier with the Units they have bought from Russia subject to a globally valid guarantee.
I noticed that EDF and Gazprom have just agreed a transatlantic gas swap. Unitisation within a clearing union would make the risk management of that transaction much easier. Sterling and dollars would be priced in gas, not vice versa.
The existing dysfunctional markets are travesties. The financial market is falling down around our ears, and the energy markets are shamelessly manipulated by trading intermediaries to the detriment of producers and consumers alike.
And yet you claim these are demonstrably better than a simple neutral, transparent and globally valid Unit redeemable in payment for gas?
You surprise me. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
how - other than default - could Units be manipulated?
default is a very real risk. And it's just a small subset of the "political manipulation" ensemble. It's a big enough risk to make an absolute certainty that your units will never fly.
My job as a project finance banker is not to lend money - most of my clients in the energy sector have more money than the banks. It is to take political risk.
subject to a globally valid guarantee.
Who can credibly provide that? I mean, other than the US (in which case, your "unit" will be called the "dollar") or maybe the Europeans (in which case, your "unit" will be called the "euro") In the long run, we're all dead. John Maynard Keynes
But is it not a very real risk with debt denominated in currency as well? True, oil producing countries are not the most trusted of governments. But, let's say Germany creates units redeemable for its wind turbines production, would the fear of default be that strong?*
Although, of course, a central bank can always decide to print more money than it expected to, whereas Germany can't decide to produce more electricity -so the risk of default is probably greater with a redeemable unit.
"in which case, your "unit" will be called the "dollar""
Is that so necessarily? Is the point not to back the unit to something useful that cannot be devalued easily? Would USA directly price their goods in the unit if it existed?
Couldn't the guarantee be provided jointly by USA and the EU? Of course, the next question is would they want to (since that would stabilise the exchange rate somewhat, not necessarily what governments really want). "Few can believe that suffering, especially by others, is in vain. - Galbraith"
"default is a very real risk." But is it not a very real risk with debt denominated in currency as well?
The point is that it is a separate, additional, source of default. In the long run, we're all dead. John Maynard Keynes
What's so difficult about (say) an International Gas Trade Association whose members - sell-side and buy-side - enter into a mutual guarantee agreement, and back it up with provisions into a default fund in respect of trade balances?
As you say, its the end users who have the assets to back the guarantee - not the banks.
You prove my point that banks should move aside and become service providers in respect of the undated direct peer to peer credit which exists between the Unit issuers and Unit holders.
It's in banks' own interests to move to service provision - don't you understand that? The only capital requirement they then have is that necessary for operating costs. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
So you could manage political risk with debt finance but not with unitisation? Quite a feat, since in fact, because there is no interest burden in unitisation the obligation is less. Conventional debt finance is clearly MORE likely to default.
No, it's less likely to default, because it takes no risk on the unit validity. If you don't want to take price risk (on gas or interest rates), you can negotiate fixed prices / fixed interest rates very easily. In the long run, we're all dead. John Maynard Keynes
The political risk of default by Unit issuers will be addressed through the Clearing Union/Guarantee Society mechanism. ie a globally applicable interactive/consensual framework agreement, not some monolithic centralised quasi Central Bank issuing global fiat currency ex nihilo.
The backing for the mutual guarantee would not come from the limited balance sheets of credit intermediaries - or a single point of failure counterparty probably owned by them (and from which they would in all probability walk away in extremis). It is based upon the balance sheets of end user producers and consumers collectively, which you said yourself is where the financial substance is.
This mutual guarantee would be supported by a guarantee payment/provision collected from both the sell side and buy side (ie analogous to Keynes' Gesellian Bancor proposal), and held by a custodian.
Risk management, access to data/transparency, dipsute resolution etc and the equivalent of monetary policy - ie Unit issue compared to supply capacity - would be carried out by service providers.
It is necessary to view my proposal for energy unitisation in the correct context, and that is the International Energy Clearing Union I have advocated for several years. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
There's no sovereignty given up, any more than there is under - say - the BOLERO contractual platform for transfers of title of goods in transit.
BOLERO is a very interesting beast in relation to international trade finance, with which you may or may not be familiar. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Would flows of money into such unit investments be likely to show the same correlations with unit price as flows of retirement fund money into oil futures showed over the last two years? As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Would flows of money into such unit investments be likely to show the same correlations with unit price as flows of retirement fund money into oil futures showed over the last two years?
This interview sets out my views on the role of ETFs in the energy markets.
I would argue that a combination of direct transactions between producers and consumers in the physical gas market with the use of Units for investment and payment would combine to cure the problems of the current dysfunctional market.
In particular, investors need no longer get shafted by intermediaries the way they do now, because transaction costs are massively reduced, and they would potentially have the choice of using Units in payment for gas supplied if there are no investors bidding at an acceptable price. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Galbraith's 'Bezzle' comes to mind -an economic loss where the losers do not know that they are losing....well actually, they do, but they can't work out quite how.... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
