Rigs and Spreads Feb. 3: Worrying

Rigs counts were down

  • Total oil rig counts fell sharply, -10 to 599

  • Horizontal oil rig counts also fell, -4 to 556

  • 3 of 4 lost horizontal rigs were from the Permian.  Worrying.

  • The pace of horizontal rig additions fell to -1.75 / week on a 4 wma basis

  • The rig count has been eroding now for 2½ months

  • The calculated US breakeven to add horizontal oil rigs fell to $73 / barrel WTI versus $73 on the screen at writing.  

  • Frac spreads fell, -8 to 270, still no higher than a year ago

    • As with rigs, the local peak was reached on November 25th at 300 spreads.  

    • At current rig and spread counts, at latest productivity levels, DUCs appear to be falling once again

  • The data suggests the US shale sector is at a turning point

    • WTI has averaged $85 / barrel (with a lagged value) during the last ten weeks in which rig and spread counts have been declining.  This is a high price by historical standards.  Nevertheless, declining rig counts say it is not high enough.

    • This development is unprecedented since the beginning of the shale revolution for oil, around 2010. In 2018, for example, the rig count was rising at $60 / barrel; now it is falling at $85 / barrel, and from a lower level

    • The latest US data for November and December show declining oil production, down about 300 kbpd compared to October.  This is historically unusual.

    • Trouble is brewing.

The Oil Supply Outlook (and why it matters for Ukraine)

Perhaps nothing will influence the medium to long term prospects of Ukraine more than the oil price. If prices rise to $140 / barrel, as Pierre Andurand, the world’s best known oil trader, suggests, then the EU / US embargoes and price caps on Russia oil will prove politically untenable, and Russia’s financial resources will be all but unlimited.

In my last Ukraine-related post, I looked at demand and assessed Andurand's claim that oil demand could rise by a hefty 4 million barrels per day (mbpd) this year. 

In this post, we look at the oil supply. What is the outlook for growth? Will it be able to keep pace with demand, or are prices set to rise towards $140 / barrel?

The Historical Context

As the graph below shows, until 2005, the global oil supply was growing at a solid pace, with gains coming principally from OPEC and post-communist Russia.  During this time, US oil production was declining, as it had been for many years, by about 0.1 mbpd on 9 mbpd of total petroleum liquids output.  The decline was slow, but perceptible and inexorable.

In 2005, all that changed.  Russia and OPEC were no longer willing or able to add supply in the medium term, and the US could only watch its own resources decline.  For four years, from 2005 until 2009, the oil supply barely budged.  This culminated in the oil price spike of 2008, when the US benchmark WTI oil price hit an all-time record of $147 / barrel. Two months later, the global economy was consumed by the Great Financial Crisis.

Figure 1.

Source: EIA

The financial crisis morphed into the Great Recession. Oil producers scrambled to cut production in the hopes of propping up plummeting oil prices. This ultimately proved successful, and by 2010, the global economy was growing again. Oil production recovered with economic activity.

Nevertheless, the oil supply was once again unable to keep pace with the recovery of the global economy, and by 2011, the European Brent benchmark had soared to $110 / barrel. It would remain in this range for the next three and one half years, through June 2014.  During this period, the US struggled with 'secular stagnation', and Europe entered yet another recession, even worse than the one it had just exited.  The economic stresses of high oil prices were evident.

Salvation came from an unlikely source: the US.  Although US oil reserves are among the smallest of the major producers, they are efficiently exploited, and US innovation and entrepreneurship are unmatched.  US oilmen discovered that they could extract natural gas from rock -- shales -- and then applied that knowledge to extract oil using horizontal drilling and hydraulic fracturing -- 'fracking'.  Fracking was wildly successful.  From 2008 to 2022, the US added 11.7 mbpd to the oil supply (comprising crude oil and condensates from oil wells and natural gas liquids (NGLs) from gas wells).  To put it in context, US shale production growth since 2005 exceeds the total production of Russia or Saudi Arabia.  By itself, US shale liquids (crude + NGLs) would be the world's second biggest producer after the United States.  

In fact, US shales have provided more than 80% of the incremental world oil supply since 2005.  US shales, along with Canadian shales and oil sands, have provided effectively all of the net incremental oil supply since 2005.  In the last seven years, US shales have carried the global oil system single-handedly.  

Of course, other countries also added production.  The Russians contributed modestly, and the Brazilians a bit more.  But one group contributed effectively nothing: OPEC.

The OPEC supply of petroleum liquids (crude oil + natural gas liquids) was essentially the same in 2022 as it had been in 2005.  OPEC has added nothing to the global oil supply in seventeen years.  Indeed, Saudi Arabia is pumping about as much today as it was in 1979, before the second oil shock.  It is true that OPEC was pumping 3 mbpd more in 2016 than it is today, and that OPEC has the capability of expanding production to an extent.  But the underlying reality is far from what most people think.  OPEC supply has not changed much in the last seventeen years.  US shales, by contrast, are still considered the newcomer, a nice addition to the oil supply, but are thought of as just the icing on the OPEC cake.  Nothing could be farther from the truth.  The global oil system has been fully dependent for growth on US shales since 2005.  

Looking Forward

What can we expect from the world oil supply in the coming years?

This hinges, first and foremost, on trends in US shale oil production.  Shale oil comes essentially from just five plays, the Permian, Bakken, Eagle Ford, Niobrara and Anadarko (using EIA nomenclature).   The Permian, in west Texas, is by far the most important.

Figure 2.

The EIA has muted expectations for US oil production growth in 2023, with supply in October 2023 forecast to be only 0.1 mbpd higher than this past November.  That will not come even close to the 1.9 mbpd of demand growth the European IEA expects this year.  

Figure 3.

Source: Various editions of the EIA monthly STEO

On a longer horizon, the situation is potentially even more problematic.  Not all shale plays are the same.  The key shale plays other than the Permian -- that is, the secondary plays comprising the Bakken, the Eagle Ford, Niobrara and Anadarko -- are producing 0.9 mbpd less than their peak production in October 2019.  They are more than three years past peak production.  Indeed, the secondary plays are collectively producing less than they did eight years ago. Although their production is recovering modestly, they are unlikely to ever regain earlier highs.

Figure 4.

Source: EIA January 2023 DPR

As a result, the Permian basin has been left to meet global demand by itself, and it has successfully done so since 2015.  The question is how long the Permian can continue to do this.  As the graph above shows, Permian production growth has been solid, adding about 40,000 bpd every month, potentially 0.5 mbpd for 2023 as a whole.  Nevertheless, the drilling rig count in the Permian (below) is largely unchanged since June.  If rig counts remain stuck at their current level,  production may also be expected to plateau within 12-18 months, that is, the Permian could reach its maximum output this year. In fact, some analysts have begun to question whether peak US production has already arrived or is perhaps just a few months ahead of us. Historically unusual production declines in November and December are consistent with this view.

Figure 5.

Source: Baker Hughes, Bloomberg

A peak would come as no surprise.  A plateau for US shale oil production has been forecast for the 2023-2025 time frame since at least 2017.  The EIA's forecasts from 2017, 2019 and 2022 can be seen below, and all of them expect US production to plateau by mid-decade.  Nor are EIA forecasts outliers.  Mainstream forecasters like Goldman Sachs have expected a mid-2020s peak since at least 2017.  Those who follow the data have known for years that US production could crest in the mid-2020s.  It has been expected for a long time.

Figure 6.

Source: EIA Annual Energy Outlook (AOE), 2017, 2019 and 2022 editions

If US production can no longer meet incremental demand growth, what other countries could step up?  

Brazil and Canada are the key countries outside the OPEC+ cartel.  Other major producers like China or Norway do not add much extra oil. In recent times, Brazil and Canada have been able to add 0.3 mbpd / year, just enough to offset declines elsewhere.  In a very good year, they might add net 0.4 mbpd.  Therefore, if the US is out of the picture, the remaining non-OPEC+ countries — principally Canada and Brazil — can be relied on to meet no more than one-third of incremental oil demand in a better year.

Figure 7.

Source: EIA

For the balance of needed barrels, the world must look to Russia and OPEC.

Russia is, of course, under sanctions, but production there is only 5% below expected levels.  As a result, Russia's spare capacity is minimal, even if it were able to freely export.  Further, Russian oil production under Putin has tended to show steady growth of about 0.2 mbpd / year, and we might expect similar growth in the future, all other things equal.  The war, however, has adversely affected the outlook.  Sanctions have delayed a number of Russia's more sophisticated projects, and Russia’s wartime fiscal needs are likely to cannibalize at least part of the capital expenditure programs of companies like Gazprom and Rosneft.  Consequently, stagnation or even decline in Russia output would come as no surprise.  For planning purposes, a meager Russian addition of 0.1 mbpd / year might appear plausible for the balance of the decade. This is far from sufficient to meet world demand growth.

That leaves OPEC.  

OPEC produced 2 mbpd above current levels before covid, but cut production to counter weak demand associated with the pandemic.  As a result, OPEC has excess capacity of 3 mbpd, of which approximately 1.5 mbpd could be brought back on line over a period of 6-18 months.  This is enough to meet the IEA's anticipated demand growth of 1.9 mbpd for 2023 without any notable price shock.  

Figure 8.

Source: EIA

For Russia and OPEC, however, the question is intent.  All business cartels -- including OPEC -- exist to maximize selling prices by limiting production.  As a result, OPEC -- and now the OPEC+ cartel including Russia -- have an incentive to add production with a lag, that is, to allow growing demand to drive up oil prices, commit some capacity to slow the price rise, allow demand to grow again, and let oil prices rise again, and commit some additional capacity. The result is a gradual spiraling up of prices, with supply never quite catching up to demand.

By implication, those expecting OPEC to save the day and materially increase production over the next several years are likely to be disappointed.  OPEC's average additions are likely to be similar to those of the last ten or twenty years: +0.2 mbpd / year on average, with significant lumpiness.  OPEC's modest additions -- even supplemented by Brazil, Canada, and Russia -- are unlikely to keep pace with demand growth.

Instead, OPEC will be looking to recreate the conditions of 2011-2014, when oil prices averaged $110 / barrel.  Adjusted for inflation, that is $140 / barrel today, just the number Pierre Andurand highlighted.

This should not be taken to imply that oil prices will rise to $140 / barrel in the near term.  Supply continues to run ahead of demand, OPEC still has a comfortable spare capacity cushion, and the outlook for the global economy remains choppy. 

Nevertheless, the conditions are present for a material tightening of the market in the medium to long term.  After 2023, oil price trends favor Russia, and perhaps substantially so.  For Ukraine, this could pose a serious threat, as the current European and US sanctions on Russian oil are unsuitable to deal with such an eventuality.

California Pot's Lessons for Migrant Amnesty (Part I)

As readers know, we advocate for a legalize-and-tax system to close the southwest border to illegal immigration, just as it has for marijuana smuggling.  At the same time, we are witnessing the collapse of the legal marijuana system in California, and that carries important lessons for a market-based system to end illegal immigration.

An article from this weekend's San Francisco Gate decries a “mass extinction event” for California’s legal marijuana industry, with thousands of companies expected to go out of business this year.  The Gate flags the obvious reason: “You can't make any money in this market.”

The state’s complicated cannabis regulations and high taxes add costs to legal operators, while widespread illegal farms and retailers undercuts legitimate companies. Limited access to banking means these companies pay exorbitant fees for simple banking services and have almost no access to loans. Federal law blocks pot companies from deducting most business taxes from their federal taxes, making pot businesses pay an effective federal tax rate as high as 80%. 

Clearly, the authorities in California never bothered to conduct an analysis of the marijuana business to determine the maximum compliance costs and taxes which the market would bear.  This is not a hard number to calculate, and as always, we start with the consumer.  At issue is the premium the California consumer is willing to pay for legal marijuana.  Even a brief review of the literature suggests that the maximum viable premium is about one-third over the price of street marijuana, in dollar terms about $75 / ounce. To appearances, the authorities never set $75 / ounce as the maximum burden the legal industry could bear and instead just piled taxes and compliance costs onto legitimate producers and resellers.  As a result, legal pot costs $230 / ounce more than the street variety.  That mark-up is three times the number Californians are willing to pay.  No surprise, customers are returning to black market marijauna, and the legal industry is imploding.  California botched marijuana legalization because it ignored the economic realities of producers and consumers.  

These risks also apply to a legalize-and-tax system for illegal immigration. 

Given the strength of the US labor market, the value of a one-year work visa for a Mexican day laborer is probably in excess of $9,000.  That is, an unskilled Mexican worker would gladly pay the US government $25 / day for the right to work in the US on demand.  If background-checked migrants could purchase such a visa for $9,000 (not $1,000 as GMU professor Bryan Caplan would have it), the border would be effectively closed to illegal immigration.  

The border is not the issue.  We ended alcohol smuggling from Canada and Cuba with a legalize-and-tax regime, that is, with the repeal of Prohibition.  We have ended marijana smuggling over the southwest border with only partial legalization of marijuana on the state level.  We can end the smuggling of migrant labor over the border the same way.  That's not the problem.

Rather, the challenge is visa renewal.  If the incumbent black market is allowed to operate in parallel with a legalize-and-tax system, then migrants who paid $9,000 will be working shoulder-to-shoulder with undocumented immigrants who entered the US earlier and are paying nothing for the right to work here.  The risk is that legal migrants will allow their visas to lapse and join the undocumented: $9,000 is a big incentive to become illegal.

Therefore, the existing black market in labor must be addressed when a legalize-and-tax system is introduced. There are two options: deport the incumbent undocumented or, alternatively, legalize them with a work permit.

For conservatives, deporting illegals is the preferred option.  After all, these people are breaking the law and should be punished accordingly.  Much as this might provide moral satisfaction, it won't work, for several reasons.

First, any such proposal will fall to garner Democratic support.  Nor will it find sympathy with Republican moderates like Susan Collins (Maine), Lisa Murkowski (Alaska) and Mitt Romney (Utah).  Any initiative built on the deportation of 10 million undocumented migrants will never make it out of committee.

Second, mass deportation is unacceptable to the American public.  Readers will recall the migrant poultry raids of 2019 under the Trump administration.  These were widely condemned.  The US public is simply not prepared to stomach the arrest and expulsion of otherwise law-abiding people working at regular jobs and trying to provide for their families.  Such efforts will be criticized as "inhumane", "cruel" and "Gestapo actions".  Not surprisingly, these sorts of raids were quietly deprioritized following the uproar -- over only a few hundred migrants.  Imagine the challenges of trying to deport 10 million.

Third, employers will not release their labor until they know they have a replacement.  Entire industries depend on undocumented labor, and if ICE attempts to remove illegals at scale, the managers, owners, lobbyists and lawyers of those same industries will descend on Congress, the White House and the various bureaucracies like a plague of locusts.  And given that these same businessmen are prominent members of their local communities and important political contributors, politicians on the Hill, both Republican and Democrat, may be expected to fold like lawn chairs.  They have in the past.

Finally, apprehending undocumented workers fearing deportation is not easy.  They will flee and hide and arresting even ten thousand will prove a formidable task.  

As a result, the likelihood of dismantling the black market in migrant labor through deportation approaches zero.  It is not worth trying.  This has nothing to do with justice, fairness, or the sanctity of law, principles which I will readily concede to my conservative readers.  Instead, it is all about real world considerations.  The issue is not the best policy in abstract, but rather the best that can be achieved given realities on the ground.

The existing black market can only be dismantled, as a practical matter, by legalizing it, that is, by issuing work permits to those workers who have not otherwise committed serious crimes like murder, assault, theft or rape.  Workers will face a choice: take a work permit or be deported.  This is not a hard decision, nor is it hard for the employer.  Managers, as a rule, prefer to follow the law.  It has both lower criminal and career risk.  Human resources and operating managers will be grateful for legalization as long as it does not reduce their workforce or materially increase their costs, and legalization should do neither.  A legalize-and-tax system can 'drain the swamp' of illegal labor, but will only succeed by legalizing most of the long-term undocumented in the country.  

As the precedent of California's botched marijuana legalization shows, closing the border to contraband -- whether marijuana or undocumented labor -- is not enough to end the internal black market, in our case, the employment of undocumented residents without work permits.  The prohibition on both new and existing migrant labor must be lifted to regain control over the border and bring order to the internal US labor market.  

EIA PSR Week of Jan. 20: Faltering consumption, continuing crude builds

  • The news this week centers on faltering refined product consumption (demand) and shockingly weak refinery runs

  • Consumption

    • Total product supplied and gasoline supplied were respectively 7% and  11% below normal (the same week in 2019) on a 4 wma basis

    • Moreover, both total product and gasoline supplied were also at lows not seen since early September

  • Refinery runs were down more than 16% on a 4 wma basis compared to normal (2019).  

  • Inventories

    • Despite weak consumption and an anemic level of runs, refined product inventories remained at typical levels, primarily due to exceptionally high product exports.  This is probably related to gasoline and diesel stocking in the EU prior to the implementation of the product import embargo starting on Feb. 5th.

    • Crude inventories builds have been tapering, still up a hefty 27 mb in the last month

    • The SPR was unchanged compared to last week

  • Low runs, faltering consumption and crude builds are sometimes associated with the beginning of an economic downturn

  • Meanwhile, C+C (i.e., oil) production remains stuck at 12.2 mbpd, materially unchanged since April

  • Finally, oil prices remain in soft contango to mid-year before reverting to typical backwardation levels in the second half of the year.

    • With the current contango, owners of physical oil have an incentive to store crude, and that is exactly what they have been doing in the US

  • If Russian refined product exports do not fall with the Feb 5th embargo, there is a downside case for oil prices, and a $10 / barrel sell-off is not out of the question.

Rigs and Spreads Jan. 20: Sizeable rig declines

Rigs counts were down

  • Total oil rig counts fell sharply, -10 to 613

  • Horizontal oil rig counts also fell, -6 to 559

  • Four of the six lost horizontal rigs were in ‘Other’, that is, not in major plays

  • The Permian horizontal oil rig count was down only 1

  • The pace of horizontal rig additions fell to -2.0 / week on a 4 wma basis, quite a poor performance considering recent oil prices

  • The calculated US breakeven to add horizontal oil rigs rose to $82 / barrel WTI versus $81 on the screen at writing.  

  • Frac spreads rose, +4 to 258, still no higher than in February nearly a year ago

  • The EIA published the January edition of the Drilling Productivity Report (DPR) this past week

    • In the current report, crude and condensate production from key shale plays rose to 9.04 mbpd in December, up 79 kbpd from November.  Total shale oil production growth has averaged 82 kbpd / month over the last three months

    • In the January report, the EIA revised up historical shale production quite sharply, on average by more than 130 kbpd in the Sept. 2021 to June 2022 time frame.   Current growth rates appear smaller as a result of base month upward revision.

    • Permian oil (C+C) production was up 38 kbpd in December.  Permian production growth has averaged 38 kbpd per month over the last three months

    • The DUC inventory bottomed in November and was up modestly in December.  We had anticipated the trough in September, but the correction was slower than expected

  • We continue to see a disconnect between DPR oil production numbers and those reported in the monthly STEO and the weekly PSR

    • The DPR suggests healthy production growth; the other reports suggest all but stagnation in output

Dec. Border Apprehensions: New CY Record

Customs and Border Protection reported December apprehensions for the US southwest border at 221,181, a new record for the month.  This bests the previous record, set by the Biden administration last year, by 50,000 and is three times the prior record of 71,000 set by the Clinton administration in 1999 and revisited by the Trump administration in 2020.  December apprehensions were also 60,000 above our forecast, the highest variance of the year, implying an upward trend in border apprehensions.

The numbers are simply surreal.  

With the December numbers now in, we can also present calendar year totals.  For calendar year 2022, border apprehensions reached 2,343,000.  This is 400,000 more than the previous record set last year by the Biden administration.  It is also 700,000 above the pre-Biden records of 1.6 million set by the Clinton administration in 2000 and the Reagan administration in 1986.

With December apprehensions exceeding expectations, we increase our calendar and fiscal year 2023 forecast for southwest border apprehensions to 2.7 million, which would represent a new record by 400,000 over fiscal and calendar year 2022.  These are truly mind-blowing numbers.  Annual southwest border apprehensions are beginning to approach 1% of the total US population.  

As before, inadmissibles -- those presenting themselves at official crossing points without appropriate documentation -- continue to soar, coming in at 30,306 for December.  This is twice the prior record, set in 2016 under the Obama administration.  As we earlier noted, the continued rise in inadmissibles suggests that Immigration and Customs Enforcement is materially waiving applicants through, presumably by guiding them to asylum procedures.  In earlier times, inadmissibles were not let into the country, hence the term 'inadmissible'.  The continuing, rapid and material rise in the inadmissibles count indicates that one can indeed enter the United States today at official crossing points without proper documentation.  

The numbers at the border have important lessons for both the left and right.

My libertarian friends at CATO and their academic counterparts at GMU have called for open borders.  For example, Bryan Caplan, professor of economics at GMU, has called for a border fee of $1,000 for entry to work in the US.  My earlier market analysis indicated that a $1,000 entry fee would be consistent with a potential market exceeding 1 billion migrants. 

The current pace of apprehensions show that the market is indeed vast.  Today's undeclared open borders policy can induce 3 million migrants to come north annually.   If migrants could enter legally for $1,000, arrivals could easily jump to 5 million per year, and perhaps twice that.  And they will keep coming until they are indifferent between staying at home and coming to the US.  Day laborers from Cameroon earning $0.50 / hour at home would be happy to come to the US and earn $3 / hour or be unemployed 70% of the time at current wages.   India, Bangladesh and Pakistan have hundreds of millions in the $0.50 / hour wage category.  And they would keep coming, faster than we could absorb them, until unskilled wages or unskilled employment fell so low that the journey was no longer worth it, when migrating to the US was no better, all things considered, than staying at home.  And staying at home in Cameroon or Bangladesh for an unskilled worker is a hard reality.  Open borders would import that reality into the US.  We can import the slums of Calcutta or the favelas of Rio de Janeiro.  There is precedent.  Government policy allowing in large numbers of poor immigrants created the banlieues of Paris and ghettos of Copenhagen.   That could, and would, happen here as well.  This is not a matter of ideology or bigotry, but rather straight-forward market analysis. For poor citizens of the poorest of countries, poverty as we think of it in the US can be a big step up from their daily lives at home.

From Professor Caplan's 2019 graphic policy book, Open Borders

The border situation also offers lessons for conservatives.

First, border enforcement is more about intent and will than physical barriers.  Apprehensions do not run at three times the previous historical record unless the president wants it that way.  We can see for ourselves that a wall is meaningless if the administration refuses to enforce the border.  For conservatives, therefore, any solution must work under both Republican and Democratic administrations.  It must be durable under changing political conditions, and that means the interests of both the right and the left must be served by any solution to achieve consistently acceptable results.

Second, an insistence on absolute sovereignty — a southwest border sealed against migrant labor — will prove a disaster.   After four years of Trump's vitriol against the Central American migrants, the US is seeing a tsunami of illegal immigration.  If conservatives want to play an all-or-nothing game, well, right now you are getting nothing.  

Third, we ended marijuana smuggling over the border without a wall or draconian enforcement.  We do not need a wall or draconian enforcement to end illegal immigration. 

A legalize-and-tax system will work, as it has for marijuana and earlier alcohol.  Will it be perfect?  No.  Alcohol, for example, still causes material damage to the US economy. The CDC estimated the cost of excessive alcohol use in the United States at $249 billion in 2010, and binge drinking was linked to 140,000 premature deaths.  With all this carnage, do we intend to reinstate Prohibition?  No, and for good reason. The costs of Prohibition were much higher than the costs of dealing with legal alcohol.  For the black markets I have examined, the costs -- including corruption, violence, gangs, enforcement, and incarceration -- were 10-20x greater than the underlying problem. 

So it will be with a legalize-and-tax system for migrant labor.  Can such an approach deliver absolute sovereignty?  It cannot. But it can deliver safety, legality, propriety and appropriate compensation to the government for the right to work in the US at a B+/A- level, which is both good enough and ten times better than the current state of affairs.

Open borders also holds lessons for the left. As I wrote almost two years ago, open borders would destroy the chances for the normalization of the status of the long-term undocumented, including those covered by proposed DACA and Dreamers legislation. So it has proved.

Leaving the southern border wide open is contemptuous of the American public, a complete dereliction of the president’s duty to protect and control our borders. Under the circumstances, the votes for normalization will be lacking, as they were in the last two years when the Democrats held both the White House and Congress. Moreover, this impasse could last fifty years.

One of the strange features of black markets is their tendency to persist, as has been the case with illegal immigration. Since the IRCA amnesty fiasco of 1986, Republicans and some Democrats have been loath to consider offering any such leniency again. Nevertheless, at least some Republicans were sympathetic to the cause of DACA and the Dreamers.

That’s finished. President Biden’s Open Borders policy has gutted confidence in the willingness of any Democrat in the future to enforce agreed border legislation. Prior Democratic presidents were sympathetic to migrants, but generally enforced the border. Clinton saw a surge in 1999, but suppressed it within months. Obama’s apprehensions numbers were actually better than Trump’s. By contrast, Biden’s complete abandonment of the border is something new and unprecedented, and it will color Republicans’ willingness to strike a deal with Democrats for the next half century. Lest this be taken as exaggeration, keep in mind that many of those entering the US illegally after 1986 are still waiting for normalization of status. That was nearly 40 years ago. As a practical matter, the undocumented are neither expelled nor accepted, but merely tolerated in the shadows. This is the political equilibrium, as dysfunctional as it is stable. It can easily persist for decades to come, just as it has since the 1980s.

For the pro-migrant, woke left, the only plausible path to normalization is a legalize-and-tax regime. Such a regime requires not only legalization at the border, but also in the US interior. Barring that, a legal entry system will be comingled with a black market interior, with poor results. California’s botched marijuana legalization serves as an example of failing to address the incumbent black market. As a result, the large majority of long-term undocumented residents must be provided legal status — a work permit — if a legalize-and-tax regime is to be successfully implemented. For those looking for status normalization of the long-term undocumented within the next ten years or more, a legalize-and-tax approach is the only hope, not because granting legal status is nice or compassionate, but because it is necessary to clean up the mess of the last fifty-eight years.

The current tsunami at the border has lessons for all ideologies. For libertarians, open borders has been demonstrated as the disaster which analysis said it would be. For conservatives, a wall is clearly not enough, and an all-or-nothing approach is proving to be a dead-end. For the woke left, advocacy of open borders has betrayed the long-term undocumented, whose hopes for legal status may have to wait for a very, very long time.

Despite all this, fixing the border is perhaps the lowest hanging fruit in the US policy universe. At the conceptual level, it is just about a no-brainer. The politics are of course challenging. Execution also matters, and neither the structuring nor implementation of a legalize-and-tax system are trivial. Nevertheless, we can achieve stunning success if we commit ourselves to the endeavour.

DOE Weekly Data Jan. 13th: Soaring crude inventories

The crude oil aspects of the data were most interesting this week.

  • C+C production is up very modestly, +0.1 to 12.2 mbpd, materially unchanged since April

  • Commercial crude inventories have soared since the start of the year, adding 30 mb in just the last two weeks.

  • The collapse of refining, the source of demand for crude, is the key factor.  Refining has been down 2.8 mbpd on average over the last three weeks.  With refinery output down, crude inventories accumulate, given that crude imports have remained range-bound

  • Our incentive to store analysis also suggests quite soft balances, that is, our analysis is showing an explicit incentive to build crude oil inventory, and that’s exactly what we are seeing in the data.  This incentive will be similar around the globe.

  • Draws from the Strategic Petroleum Reserve appear to have ended, with crude SPR inventory stabilizing around 370 mb versus a neutral value of 640 mb.  This may well prove a problem going forward.

  • Refined product demand remains range-bound, still off 2019 levels by 3-7%, off by 11% in the case of jet fuel.

Rigs and Spreads Jan. 13: An uptick, but range-bound

  • Rigs counts were up

  • Total oil rig counts rose, +5 to 623

  • Horizontal oil rig counts also rose, +2 to 565, largely unchanged in the last three months

  • The Permian horizontal oil rig count was up, +3

  • The pace of horizontal rig additions rose to 0.0 / week on a 4 wma basis

  • The calculated US breakeven to add horizontal oil rigs fell to $80 / barrel WTI versus $78 on the screen at writing.  

  • Frac spreads rose, +4 to 254, no higher than in February

  • The DUC count is increasing by our calculations

    •  DUC inventory rose to nearly 20 weeks of turnover, the highest since March

  • Overall, the story is as it has been in recent times

    • Rigs, spreads and C+C production remains range-bound

    • As we have been commenting for months, the FT also notes that the shale revolution appears over

The Andurand Thesis

Pierre Andurand, the world's best known oil trader these days, believes that the market is underestimating the scale of the demand boost from the end of covid lockdowns.  Oilprice.com notes that Andurand sees the possibility of crude oil demand growing by more than 4 million barrels per day (mbpd) this year—a 4% increase over last year.  “I think oil will go upwards of $140 a barrel once Asia fully reopens, assuming there will be no more lockdowns," Andurand said.

This is quite an assertion, and as OilPrice notes, far exceeds the demand growth forecasts of other analysts. How well founded is Andurand's assertion?

There are many ways to create oil forecasts.  One of these relies on long-term trends.

Oil is a kind of utility for the global economy, that is, oil consumption tends to rise at a fairly steady pace from year to year with GDP.  At times, consumption grows faster than trend, but then a recession comes along and resets oil consumption to a lower level.  From there, demand tends to climb back to its long-term trend.  Indeed, if we project out a simple linear trend based on the years from 1997 to 2003, that is, before the rise of China and the subsequent 'peak oil' period, we can still predict with considerable confidence oil consumption twenty years later.  Consumption tends to return to its long-term trend

At present, we are off trend, and by quite a bit, due to the covid pandemic and the resulting lockdowns.  Compared to the '97-'03 trendline, consumption was 3.3 mbpd below expectations in 2022 and falls 3.4 mbpd below trend in 2023 compared to the EIA’s latest forecast.  To return to trend, consumption would have to grow 4.5% in 2023, just as Andurand contends.

Source: EIA, Prienga analysis

But the numbers may prove even more dramatic.  The '97 trend line does not fully consider the rise of China, which materially began to drive oil consumption growth from 2003, leading consumption to rise above the '97-'03 trend line during the 2004-2008 period.  This growth was reversed by the Great Recession and constrained by an oil supply unable to keep up with demand until mid-2014.  In August 2014, however, explosive US shale oil growth allowed supply to catch up to demand and cratered oil prices.  This allowed consumption to regain the 2003-2008 trendline which captures the rise of China.  In the three years before the pandemic, therefore, oil consumption was indeed on the trendline incorporating China's rise with no sign of an overheated oil market or an unsustainable trend in consumption.  Therefore, but for the pandemic, we would have expected world oil consumption at 105.8 mbpd in 2023, a full 5.3 mbpd above the EIA's current forecast for the year.

If long-term trends are the right approach to thinking about the future, then even Andurand's aggressive forecast may prove too tame.  The upside surprise could be as much as 6 mbpd.

Timing matters.  Returning to trend requires the material recovery of China's economy.  This may be expected in 2023, but politics in Beijing look fraught. A scary China may be a slower-growing China.  Further, the reversal of pandemic fiscal and monetary stimulus is expected to bring recession across much of the world.  And finally, the Russo-Ukrainian war throws a wrench into all predictions.  How and when the world returns to a pre-pandemic, pre-war normalcy is hard to know.  The long-term trends do, however, suggest it happens eventually.  

When it does, Andurand is likely to prove right and demand growth will exceed all expectations.  In such an event, a price forecast of $140 / barrel is by no means out of the question, and I would not be surprised if oil peaked, at least for a time, above $180 / barrel.

US Employment Trends March - December 2022

The March - December 2022 period proved quite unusual by historical standards. Although the employment level rose by more than 900,000 during this period, those employed full time actually declined by nearly 300,000, even as part-time workers soared by nearly 900,000 and multiple jobholders advanced by nearly 700,000.

A simple interpretation might suggest that service employees sidelined by covid returned to their jobs during this period, with some of them downshifting from full to part-time. Meanwhile, with price inflation running well ahead of wages for much of the year, many lower wage workers found additional jobs to help make ends meet.

Source: Labor Force Statistics from the Current Population Survey (LNS11000000, LNS12000000, LNS12500000, LNS12026619, LNS12600000)

Russia: Refined Products and the Oil Price Cap

The results of the Crude Oil Price Cap, which came into force on Dec. 5th, are mixed to date.  Contrary to the hopes of Price Cap proponents, Russia's oil exports in barrel terms have fallen.  Nor is the Price Cap binding for Russia's Pacific exports.  On the other hand, Russia's oil export prices toward Europe remain below the Cap limit of $60 / barrel, Russian oil revenues are down, and global oil prices remain comparatively subdued.  For the moment, the Cap can be considered a qualified success.

Source: Oilprice.com; Prienga analysis

The Price Cap and EU embargo will be extended to refined products on Feb. 5th.  Refined products comprise principally gasoline and diesel, but also include jet fuel (kerosene) and a variety of minor products.  In 2021, refined products constituted nearly 40% of Russian oil exports.  They are substantial.

Source: Reuters, UN Comtrade

Europe is Russia's largest traditional customer for refined products by far, taking about half of Russia's refined product exports in 2021. 

Source: BP Statistical Review

The practice continues.  European customers have been loading up on Russian imports, most notably diesel, with levels exceeding those of 2021.  Nevertheless, on Feb. 5th, EU imports of Russian products will effectively cease, representing a decline of perhaps 1.3 mbpd.  

Sales of refined products to countries willing to purchase from Russia may still be subject to the Price Cap if western shipping or service companies are involved.  According to guidance for products issued by the US Treasury last week, the maximum allowable payment to Russia is $60 / barrel, as it is for crude oil.

Given that European diesel futures are currently trading in excess of $125 / barrel equivalent, a $60 / barrel cap is quite a haircut.  Even allowing for lower value products like gasoline, the average value of refined products in Europe exceeds $110 / barrel.  In aggregate dollar terms, the difference between the market value of refined product imports to Europe and the Price Cap limit is about $25 bn / year.  That's quite a lot of money.

Who gets to pocket the difference?  

For starters, cheaper gasoline and diesel could benefit consumers.  Take India, for example.  Gasoline prices there are set administratively by the government.  During the pandemic, Indian pump prices tended to track Brent, just as did the Russian Urals price.   Since the start of the war, however, Delhi gasoline prices (our proxy for Indian gasoline prices) have tracked Urals rather than Brent.  This suggests that the Indian government has indeed passed on savings from cheap Russian oil to consumers.

Source: OilPrice.com; PetrolDieselPrice.com

Of course, the matter is not so clear-cut, as not all Indian refiners have had equal access to cheap Russian crude, and not all the resulting refined products have been sold domestically.  Some -- primarily state-owned refiners -- saw big losses in mid-2022 even as private refiners were re-exporting refined Russian crude as gasoline and diesel and reaping windfall profits.  

It is probably safe to say that large arbitrage profits, like those between market oil prices and the Oil Price Cap, are likely to be captured by private interests. For example, intermediaries like shippers may profit.  The Baltic Dirty Tanker Index, an average of tanker day rates on key crude oil trade routes, shows that crude tanker rates soared with the start of the war and peaked at nearly three times the long-term average heading into the Price Cap in early December.   On specifically Russian routes, the day rates may be sufficiently high to purchase the respective tanker with the profits from as few as two round trips.

Source: Investing.com

Any remaining windfall will accrue to purchasing entities, notably refiners, and associated government stakeholders.  Those most likely to benefit include Turkey; the Middle East, including Saudi Arabia; certain countries in Africa, for example, Nigeria; and, of course, India.  These countries may find it highly profitable to import heavily discounted Russian products for domestic consumption and export their own gasoline and diesel back to Europe.  

Source: BP Statistical Review

Of course, Russia could decide to cut production rather than selling at heavy discounts.  Nevertheless, this would appear unlikely.  Moscow has stated that it will not sell crude or refined products to countries which refuse to purchase those same products from Russia.  Substantively, this is a tantrum, not meaningful retaliation.  More importantly, the Kremlin has not refused to deal with service providers complying with the Price Cap.  Therefore, we can assume that Russia has elected to comply with the Price Cap for sales using western services to countries not in the Price Cap coalition, for example, to India.  On paper, Turkey should be the principal beneficiary, as Russian exports must travel only across the Black Sea to reach Turkish ports, and Turkey's product exports would not have to travel far to reach Europe.

To date, the Crude Oil Price Cap can be considered a success, but that success is principally due to demand weakness for oil products in China, Europe and the US.  At a guess, the Refined Products Price Cap is likely to produce similar results, possibly with a modest reduction in Russian exports accompanied by a re-working of refined product trade patterns with limited impact on gasoline and diesel prices.  

But the risks remain.  The chief among these is a recovery of the global economy, particularly China.  In such an event, oil prices could soar, and the Price Cap and its sponsors will find themselves taking the blame.

November Border Apprehensions: More Records

Customs and Border Protection reported 206,239 apprehensions at the US southwest border for the month of November.  It was, as every month it seems, yet another record.  Apprehensions were up nearly 40,000 on November 2021, which was a record for the month at a time.  Indeed, the greatest number of apprehensions outside the Biden administration was 76,200 in November 1999, during that fateful year of the Clinton administration. 

Apprehensions averaged 35,500 for the months of November during the Obama and Trump administrations.  Thus, as we have noted before, apprehensions are running at nearly six times 'normal' levels.

On the plus side (if we can put it that way), our forecast for fiscal and calendar year 2023 remains unchanged at 2.6 million, up 300,000 from 2022's record.

Inadmissibles, those presenting themselves at official crossing points without appropriate documentation, continues to run hot.   Calendar year inadmissibles are likely to come in at 240,000, which is an astounding number.  Inadmissibles used to be a small fraction of border encounters.  In 2022, the number of inadmissibles will be almost as large as apprehensions in a normal year.  Again, the simple interpretation is that Customs and Border Protection has been instructed to simply wave people through, hence the rising trend in inadmissibles. 

The "Feeble Joe" narrative is beginning to re-emerge.  The Oil Price Cap -- a terrible idea to begin with -- is threatening to self-destruct as oil prices rise due to collapsing Russian crude exports.  US military support for Ukraine is again being framed as excessively timid.  Ben Hodges, who served as commanding general of United States Army Europe, recently stated that "what would help Ukraine win would be for the White House to say we want Ukraine to win.  Here we are ten months into it, and they still can't get over that last little hurdle about saying we want Ukraine to win."   The perception of feebleness which characterized the Biden administration prior to February 24th is resurfacing, with border chaos a primary cause.

Let's hope the administration can steel itself, for the border is in utter chaos and emblematic of an administration spinning out of control.

Russian Oil Exports Collapse

Russian oil exports collapsed in the first full week of the Oil Price Cap regime, with Bloomberg reporting a decline in Russian loadings by 1.86 million barrels a day (mbpd), or 54%, to 1.6 mbpd.  

This was not supposed to happen.  Ursula von der Leyen, President of the European Commission, assured us that the Oil Price Cap would "stabilize global energy markets."   Similarly, US Treasury Secretary Janet Yellen, the chief advocate of the price cap, noted that "the objective is to protect the world from the consequences of a global spike in oil prices," and indeed, put  "downward pressure on global energy prices" by "maintaining a reliable supply of oil onto global markets", according to the US Treasury's website.  

These hopes were built on fragile and arguably improbable assumptions.  Maintaining a reliable supply depended upon 1) Russian compliance with the Price Cap and 2) western shipping, brokerage and insurance companies willingness to operate under Cap requirements; or alternatively, 3) Russia's ability to maintain exports levels in full circumvention of the Cap regime.

To the first point, Russia does indeed appear to be complying with the Cap.  The Kremlin has announced that Russia will not sell oil to countries in the Cap coalition, that is, countries which have, almost without exception, already barred Russian oil imports.  Putin is thus akin to the teenager who cries, "Yeah, I didn't want to go to your stupid party anyway!"  It radiates weakness and desperation.  Russia remains willing to place cargoes on vessels operating under Cap conditions.  The simple read is that Russia has caved.

The second condition is more problematic.  Western shipping companies appear to be shunning Russian cargoes.  Readers will recall that I warned specifically of this, concluding that "our analysis does not preclude a complete collapse of Russia's western crude exports."  One week of data is far from definitive, but still, collapse is exactly what Russian exports have done.  

This possibility seems to have eluded both the Treasury and the EU Commission, suggesting a policy process that was both insular and superficial.  

Treasury could claim that an oil export collapse could not have been anticipated. This argument would be more compelling had the EIA not been forecasting just such a collapse since July.  The EIA, formally known as the Energy Information Administration, is the energy markets analysis and forecasting arm of the US Department of Energy.   This is the home of oil markets expertise in the US government and just a 20 minute walk from the US Treasury building.  The due diligence process should have started with a call from Treasury to the EIA and its experts.  EIA analysts are not only competent, but in my experience, accessible and really nice people.  Treasury would quickly have learned that the EIA anticipated the Price Cap would lead to a 2 mbpd drop in Russian production, as compared to the 1.9 mbpd fall booked last week.  

The EIA staff would have explained their thinking, which should have prompted Treasury to conduct further due diligence, notably discussions with shippers, insurers, brokers and other stakeholders, including oil companies like Shell.  This does not appear to have happened.  Oil prices, for example, are not set in dollar terms the way Treasury supposes, leading to confusion about whether brokers were complying with Cap requirements or not.  Similarly, chaos broke out at the Bosporus Strait when Turkish officials refused passage to tankers without specific insurance guarantees for that particular crossing, something insurers do not ordinarily provide.  (Imagine, for example, GEICO being asked to provide specific insurance proving that you are covered to drive across the George Washington Bridge.)   Further, Shell stated that it would not hire tankers previously contracted to carry Russian cargoes for fear Russian crude dregs would remain in the tanks, thereby exposing Shell to the risk of violating Cap terms.  This alone has deterred shippers, not to mention other considerations.  Had Treasury conducted any of this due diligence -- less than a week's work for an analyst -- it would have known that the risk of western service providers balking at the Russian trade was quite possible and likely probable. 

The situation might yet have been saved by Russian craftiness in assembling a 'shadow fleet' of tankers and by Russia providing its own in-house insurance, which would have allowed Moscow to evade the Price Cap.  Alas, Russia has developed a reputation for titanic incompetence in recent months, not only in military affairs, but also in oil export management, it seems.  Shipping consultancy Braemar has estimated that Russia needed about 240 tankers to conduct its crude export trade and would fall short 100-110 tankers in the event western service providers were unwilling to carry Russian cargoes.   The early data looks even grimmer, with trade down more than 50%.  Russian incompetence never fails to astonish.

Source: Braemar

Napoleon Bonaparte once famously stated, “I'd rather have lucky generals than good ones."  Treasury and the EU Commission have been lucky to date.  A loss of 2 mbpd of supply is large by global standards.   As a rule of thumb, every reduction of the oil supply by 1 mbpd (1% of global demand) should lead to an increase in the oil price by roughly $10 / barrel.  Therefore, the current collapse of Russian oil exports, should it be sustained, might be expected to increase oil prices by $20 / barrel, all other things equal. This would prove a political disaster for the Cap's advocates and the western allies more broadly. 

Treasury's good fortune, if we can call it that, is that all other things are not equal.  Notably, the world appears to be sliding into recession, with the result that oil prices have been falling on their own.  A global downturn may yet save the optics of the Price Cap.  True, this is akin to a cardiologist being relieved that his heart patient died of cancer, but still, sometimes one has to take their wins where they can find them. 

It is still early days for the Oil Price Cap regime.  Perhaps western shippers and insurance companies will become more comfortable with the Russian oil trade under current rules.  Perhaps the Russians will collect themselves and quickly assemble an alternative fleet to move their oil.  Or possibly a global recession may render the entire issue moot.  

Be that as it may, the assumptions underpinning the Oil Price Cap have proven faulty to date. Should the global economy not implode, the political risks for the Cap advocates will rise sharply.

Some Price Cap Graphs, Thoughts on Russian Strategy

A couple of graphs on Russian oil prices (Urals-Brent) and the Urals Discount.  

The published Urals price -- the price Russia receives for oil exports towards Europe -- has collapsed to under $50 / barrel.  This is $7 / barrel below the average Russia received during the 2015-2021 period, when Urals averaged about $56 / barrel.  We place the fiscal breakeven for Russia at around $80 / barrel in September, as that is the point at which Putin called for production cuts.  That is, when Urals fell back below $80, Moscow was looking for price support.  Therefore, based on observed behavior -- not a calculation of Russian budget requirements -- we can make a case for an $80 Urals fiscal breakeven for Russia in September.  In our view, this breakeven has probably risen since then, perhaps materially (and our breakeven assumes normal levels of oil and gas exports from Russia).

Source: Oilprice.com, EIA, Prienga analysis

The Urals Discount is the difference between the European benchmark Brent oil price and the Urals-Brent oil price Russia receives for Europe-bound exports.  The Discount did not visibly increase from recent levels of $23 / barrel in the first week of the Cap.  However, it is important to note that Urals prices are released with a delay and only a few times per week, and therefore published prices may not reflect market realities in the very short term.  

Yesterday opened with the Discount rising to $29 / barrel, suggesting that Russia is struggling to find buyers for its western crude exports.  

Source: Oilprice.com, EIA, Prienga analysis

I will have more on this topic later.  For now, I think it important to note that our analysis does not preclude a complete collapse of Russia's western crude exports to the extent Russia cannot place them on its own and allied 'Shadow Fleet'.  

The western supply chain -- the shippers, insurers and the rest -- may decide to avoid the Russian business altogether.  Were I a P&I insurer, I would walk away from the Russia business without a thought if it were less than, say, 10% of my revenues.  Not worth the risk and hassle.  Without insurance, the tankers will not move the crude, and the Baltic and Black Sea trade will collapse to the extent Russia is unable to ship the oil on its own and allied vessels.  

Moreover, it would seem suicidal for Putin to acquiesce in the Price Cap, as that can only lead to worse later.   Were I the Russians, I would continue production, but drain the excess crude into a giant pit fashioned into an appropriate symbol and set it on fire, making quite literally a flamboyant gesture visible from space.  That's more the Ukrainian's style, but if Russia caves to Cap requirements, the allies will know that they have Putin right where they want him, only a few moves from checkmate.  

That Russia is earning less export revenue is all good for Ukraine (although the Discount itself is a mortal threat).  On the other hand, if the global economy fails to collapse, the potential for Brent to add a quick $30 / barrel is very much on the table.  That won't go over well in western capitals.  For that reason, cutting oil exports sharply is probably Putin's best bet.

October Border Apprehensions: Worse and worse; 2.6 m for 2023

Customs and Border Protection reported 204,273 apprehensions at the US southwest border for the month of October. This is comfortably the highest on record for the month, besting last year's record by 28%. To put it in context, October's apprehensions were more than double the third highest October, set in 1999 under the Clinton administration.

Apprehensions in October also continue to run ahead of our forecast, 31,000 above expectations. As I have noted for the last several months, conditions at the border appear to be deteriorating even compared to the outlandish levels seen to date under the Biden administration. Thus, our 2022 calendar year forecast is raised to 2.3 million, up from 2.1 million expected as of this past January.

We also make our first forecast for southwest border apprehensions for calendar and fiscal year 2023, both coming in at 2.6 million, that is, 300,000-500,000 higher than in 2022. I personally hoped that the 2022 numbers were as bad as it gets, but clearly, the mayhem at the border has upside potential. Of course, it is early days to make a hard call for 2023. Nevertheless, based on the last two months, 2023 should set yet another record for illegal border crossing -- and by a substantial margin over 2022. This coming March, April and May in particular could post some spectacularly ugly numbers.

Inadmissibles, those presenting themselves at official crossing points without appropriate documentation, continues to run hot. CBP reports 26,405 inadmissibles for October, the second highest month for any month in the past ten years. The record, 32,281, was set by the Biden administration this past April. The numbers once again suggest permissive conditions at official entry points at the southwest border.

I find it difficult not to feel a certain chagrin with the Trumpians in this past election. In the House, the Democrats over-performed by 30 seats. That is, a statistical regression would have predicted a loss of 39 seats in the House given President Biden's approval rating at the time. As of writing, the Democrats will have lost only 9, ceding a narrow majority to the Republicans.

Part of the Democrats' relative success may be attributed to the Ukraine war. A first-term president last saw a gain in the House in 2002, when President George W. Bush enjoyed an outpouring of support following the 9/11 attacks on the US. Wars tend to support incumbents electorally -- at least in the early stages of the conflict. The Russo-Ukrainian war probably helped the Democrats at the midterms.

Nevertheless, the problems run deeper for the Republican Party. Trump-endorsed candidates largely alienated centrist independents. As Karl Rove writes in the Wall Street Journal:

The election results do reflect a problem of substance, specifically the damage Republicans did with candidates who went full-on Trumpy. If they echoed the former president’s issues, tone and stolen-election claims, they often lost and in almost every case ran behind the rest of the Republican ticket.

The principal reason Republicans came up short was that just when Americans were ready to vote for them to check Democratic excesses, the GOP nominated too many radicals and weirdos.

This is now the third time President Trump has cost the Republicans control of the House or Senate. What is the takeaway for the Biden administration? Is tightening up the border a political necessity? Or will 2.6 million apprehensions at the border in 2023 become just another business-as-usual statistic, another benchmark for acceptable border anarchy?

Until the Trump Republicans nominate candidates acceptable to the median voter -- in the US, a suburban, two-car-garage independent -- Democrats will set the political agenda, and the border is likely to remain wide open.

Apprehensions shatter fiscal year record

Customs and Border Protection reported 207,597 apprehensions at the US southwest border for the month of September. This bests by 22,000 the prior record for the month, set last year by the Biden administration. Moreover, September apprehensions came in 50,000 above our forecast of 157,000. This is our biggest miss of the year and reflects an accelerating pace of apprehensions when they should be declining seasonally. That is, since July, the relative pace of apprehensions has been accelerating even compared to the stratospheric levels now normal in the Biden administration. This speaks to both a strong US labor market and deteriorating enforcement at the border.

As expected, for the fiscal year ending September 30th, the Biden administration has set a new record for apprehensions at 2,206,436. This shatters the prior record of 1,658,206 set by the Biden administration last year. Indeed, fiscal year 2022 apprehensions ran at five times the pace of the Obama administration and four times that of the Trump administration. Apprehensions under the Biden administration are not merely worse than under his predecessors, they are in an entirely different class. Nevertheless, apprehensions came in just above our forecast of this past January. We anticipated 2.1 million apprehensions, thereby undershooting the actual number by 0.1 million. The difference is due principally to the super surge of the last three months.

It is early to make a prediction for FY 2023 apprehensions. Certainly, the short-term trend suggests next year could post yet another record. Nevertheless, we are currently anticipating a sharp economic downturn from Q1, and apprehensions tend to track US job openings. Therefore, we are penciling a decline in apprehensions for 2023, and therefore FY 2022 may become the all-time record holder in the long term. Not a record the Biden administration may wish to own.

*****

Inadmissibles, those presenting themselves at official border crossings without appropriate documentation, has also been running hot. For the month of September, Customs and Border Protection reported 19,950 inadmissibles at the US southwest border, once again a record for the month stretching back to 2012, which is as far as our monthly data extends. For the fiscal year, inadmissibles totaled 172,508, 12% higher than the previous record set under the Obama administration. That these numbers are so high once again suggests that entry conditions are permissive at the border. Undocumented migrants are attempting to cross at official entry points because they are aware their chances of success are relatively high by historical standards.

One struggles to comprehend what the Biden administration is thinking. Many months ago, I wrote that the Biden administration was likely to set an all-time record for border apprehensions, and that the fiscal year numbers would be published within three weeks of the election, thereby ensuring that the Democrats would take a hit in the midterms. And so it has proved. By rights, the administration should have substantially tightened border control for the last two months to depress the apprehension numbers heading into November. Just the opposite has happened. The data show deteriorating conditions, even compared to the lofty standard the administration has set. Why? It speaks not only to an indifference towards public sentiment, but to visible incompetence in the administration. September's numbers were not only bad policy, they are bad politics.

Finally, I wrote more than a year ago that open borders would torpedo the prospects for both DACA and Dreamers-related legislation. And so it has proved. With a majority in both houses and many Republicans sympathetic to the plight of DACA participants, the Biden administration had an opportunity to pass legislation normalizing the status of at least those in the DACA program, and perhaps as many as two million undocumented immigrants in total. Given the choice, however, the administration chose to keep the border open and thereby make the topic of status normalization radioactive. Republicans will likely take the House and possibly the Senate in the midterms. As a result, the window for normalization is likely to remain shut, possibly to 2030 or beyond, as I wrote well over a year ago. Here, too, open borders proved both bad policy and bad politics.

*****

I personally like Joe Biden, even in his increasingly fossilized state. Moreover, I worry that Republicans believe that America can prosper and be a decent country without democracy. As someone whose family endured fascism and lost everything to communism in Hungary and later struggled under Argentina's Personist populism, I value democracy and sound governance. I take none of it for granted. Those who are enamored with autocracy are fools. Nevertheless, democracy has to translate into competence and values acceptable to the median voter. If the Average Joe believes that democracy no longer serves his interests, then the republic will struggle to survive. Those who value our democratic traditions need to keep that in mind.

August SW Border Apprehensions: FY Record, also Martha's Vineyard

Customs and Border Protection reported 181,160 apprehensions at the US southwest border for the month of August. This was essentially unchanged from the prior month and was the second highest August on record, bested only by last year's 195,500.

Apprehensions for the month were once again running ahead of our forecast, 18,000 above our forecast of 163,000. Ordinarily, apprehensions decline seasonally heading into the fall. They did not this year, probably due to a revival of the US job market from mid-summer, as well as, of course, the de facto open borders policy at the Rio Grande. Fiscal year-to-date apprehensions have reached 2.0 million, a new record, even with one month left in the fiscal year. This comfortably exceeds the prior record of 1.66 million set by the Biden administration in fiscal year 2021.

Our apprehensions forecast for the fiscal and calendar year nudges up to 2.2 million due to rounding, but remains essentially unchanged since we first published it in January.

Inadmissibles, those attempting crossing at official entry points without appropriate documentation, also rose in August. There is no obvious explanation for this, other than that such persons are being granted entry into the US interior. As such, both the apprehensions and inadmissibles numbers suggest a weakening of border control over the last two months.

Martha's Vineyard, Hypocrisy and Cynicism

In a cheeky move, Florida Governor Ron DeSantis flew four dozen migrants to Martha's Vineyard last week. This has created quite the brouhaha up here in Cape Cod, but it highlights the hypocrisy of the 'enlightened' left, as well as showing DeSantis capable of cynically deploying undocumented immigrants to make a political point.

Hypocrisy means acting in a manner inconsistent with one's stated beliefs. A prohibition -- including one in migrant labor -- creates such hypocrisy by pitting one's self interest against his social interest. That is, the elites of Martha's Vineyard claim to be all for poor, undocumented migrants, but not in their town. DeSantis, by shipping migrants to the Vineyard, has exposed this hypocrisy, but in a cynical way. DeSantis was not principally motivated by the ostensible goal of providing jobs for migrants, but rather intended to damage the reputation of the left by exposing their hypocrisy in the matter.

Thus, hypocrisy implies actions contradicting stated beliefs, and cynicism implies looking for hidden intentions behind those ostensibly motivating action. In both cases, self-interest is divorced from social interest. The individual is motivated to act in contraction of his stated goals or beliefs.

To attribute hypocrisy to the left or cynicism to DeSantis misses the point. Such anti-social behavior arises from US government policy, which sets the price of a work visa close to zero and consequently provides a grossly inadequate number of visas for those who desire them. The predictable result is a black market in migrant labor where all the participants have an incentive to behave in a manner inconsistent with their stated goals and beliefs. Hypocrisy and cynicism are but side effects of trying to enforce a prohibition, and this applies to all prohibitions and black markets. For example, the EU's embargo on Russian oil -- another prohibition -- exhibits the same traits in an even more pronounced fashion..

Solving the problem does not require moral rectitude. Instead, in the case of migrant labor, H2 visa issuance has to change from a volume-based approach to a market-price based approach. If visas were available at their true market value, migrant-related cynicism and hypocrisy would disappear, not in years, but in days.