Interruption In Blogging -- March 14, 2016

Later this morning, there will be an interruption in blogging. I will be biking to Southlake, where I will find a spot to begin blogging again.

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Reality Check

The Wall Street Journal reports that ENI has begun producing oil from the Arctic:Eni Starts Pumping Oil From World’s Northernmost Offshore Platform Italian company needs oil at more than $100 a barrel to break even at Arctic Goliat field.

After long delays and cost overruns, Italian oil company Eni SpA has started to pump oil from the world’s most northern offshore platform, Goliat, which is located in the Arctic about 50 miles from Norway’s northern coast.

Eni’s plans to begin pumping from Goliat were already two years behind schedule and well over budget when they hit another snag last December, as Norwegian regulators requested more information about safety and other issues before giving the green light.

The Italian oil and natural-gas company has invested about $6 billion in Goliat so far. With the continued fall in oil prices denting its margins, Eni is likely to struggle to make Goliat economically viable. Several analysts have put the break-even point for the platform at more than $100 a barrel. A spokesman for Eni said Sunday that the company expects the break-even point to be just below $50 a barrel.

Eni said in a written statement Sunday that Goliat, the first oil field to start production in the Barents Sea, is estimated to contain reserves totaling roughly 180 million barrels of oil. Its daily output is expected to reach 100,000 barrels. The Italian oil company holds a 65% stake in Goliat. Norway’s national oil company, Statoil AS A, controls the rest.

The only other time I blogged about the Goliat was on October 8, 2104. At that time the estimated cost was $7.21 billion. Something tells me $7.21 billion is closer to the real number than $6 billion.

And that's with a "b."

$6 billion for one platform. In the Arctic. Time for a reality check.

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The Amazon Page

Jeff didn't call if "Amazon" without a reason. Now, come the warehouses.

Delivery in a day is just too slow. At least, that seems to be the philosophy at Amazon, which in the last year has quietly built out a network of at least 58 Amazon Prime Now hubs in the US to fulfill one- and two-hour deliveries.

Those hyper-fast deliveries are available to Prime Now customers living in the high-density urban areas where the hubs have been built. 

The new warehouses—typically 50,000 to 60,000 square feet—are fed by Amazon’s 86 gargantuan fulfillment centers, but only with about 10,000 bestselling items as rated by the company’s internal data. An analyst said he could confirm 58 Prime Now hubs, but there could be more.

“This has probably been the most secretive piece of data that the company has not been talking about ... equivalent to Amazon having retail stores."

To slice away at shipping costs, the company is eliminating the middlemen in China who deliver goods from warehouses to seaports, opting to bring that job in-house. It also bought thousands of tractor trailers (not the trucks) to more efficiently load and ship goods. 

And most recently, Amazon announced it’s leasing 20 Boeing 767s to deliver its own goods to and from its fulfillment centers, a move that diminishes the company’s reliance on third-party shippers such as FedEx and United Parcel Service. The company’s flight hub will be in Wilmington, Ohio.

The new Prime Now hubs are one of three types of warehouses the company is running to further reduce third-party delivery costs. In addition to its fulfillment centers, it began in 2013 to build so-called sortation centers. Those warehouses are meant for nearby small-parcel shipping, which allow the company to shift deliveries from FedEx and UPS to the less-expensive US Postal Service.

“Nobody beats the post office when it comes to taking the cost out of shipping."

For example, if a customer in Boston bought a one-pound item through Amazon online, it was then shipped from the Breinigsville, Pennsylvania, fulfillment center by FedEx or UPS for about $4.50. Now, Boston shipments can be sent to a sortation center in Stoughton, MA, where the US Postal Service delivers the package for about 80% less.

At the link one can find how shippings costs for Amazon are surging.

By the way, my wife and I have found the same thing: UPS is exorbitant for mailing packages; lots of gimmicks that raise the price. The USPS is still the least expensive way to mail packages (that I know of).

By the way, the other thing Bezos has tapped into: human behavior. As delivery rates improve, and folks get used to shopping on Amazon, they become addicted. He can gradually increase prices of his products and folks won't even notice; they are still incredibly less expensive than traditional brick-and-mortar stores. The second American human behavior: consumerism. 

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Car Sales

There is an interesting story line percolating through the business news today, coming from many sources and many angles. Car sales are strong, but just below the surface things may not be what they seem. This report lists four reasons why car sales might be surging:

• increasing number of loans to those considered "bad" risks
• sales being "goosed" by ever-longer loans (I'm not sure if this is a legitimate concern)
• pushing "leases" that count as sales (I'm not sure if this is a legitimate concern)
• "dumping" sedans onto rental car companies and other bulk buyers (I'm not sure if this is a legitimate concern) 

A fifth reason was also listed, low gasoline prices, but that's pretty obvious.

The reason this story has some validity, at least for me, the issue of "sub-prime" loans for auto sales was also a big story for The Wall Street Journal today:

To understand how far the U.S. auto business has been reaching for new customers, consider the early performance of a bond issue called Skopos Auto Receivables Trust 2015-2.

The bonds were built out of subprime auto loans and sold in November. Through February, about 12% of the underlying loans were at least 30 days past due, a third of which were more than 60 days delinquent. In another 2.6% of loans, borrowers had filed for bankruptcy or the vehicles had been repossessed.

Those borrowers are at the outer fringe of the auto market. Still, the high level of missed payments for loans made so recently is a warning sign for an industry that needs every customer it can get to keep sales increasing at a record pace.