2 JUNE, 2014 TOPIC
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Football spending
Poor little rich kids
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IN SOME ways, English football is a handy analogy for England itself. It makes great play of its long history and quaint traditions. It conquered the world, only for the world to learn how to beat it at its own game. And then rich foreigners turned up and bought all the best bits.
This weekend the latest installment of a league that has run since 1888, with a couple of brief pauses for world wars, will conclude. In all likelihood, Manchester City will be crowned champions. Victory will have come at a huge cost. City once defined themselves as the home of Manchester’s real football fans, in contrast to the gloryhunters drawn to support United, their more glitzy neighbours. Then in 2008, a team that had been languishing in the third tier of English football less than a decade before, with little chance of competing for league honours, was bought by Sheikh Mansour (pictured), a member of Abu Dhabi’s ruling family. Backed by the emirate, Mr Mansour has since invested £1 billion ($1.7 billion) to turn the club into the best in the land. Wisely, it spends significantly more on wages than any other club in England. As research this week by The Economist shows, on-field success is highly correlated with the amount a club pays its players. City spent £233m on wages in the year to May 2013, £100m more than Liverpool, the only team that can now pip them to the title.
It is similar throughout the European leagues. In France, Paris Saint-Germain (PSG), the runaway leaders in Ligue 1, also have Middle Eastern benefactors who have spent heavily to ensure the championship. In Germany, Bayern Munich, by far and away the richest club in the Bundesliga, are 19 points clear at the top. In Italy, Juventus, the club with the highest wage bill, according to La Gazetto dello Sport (link in Italian), sit atop Serie A. Indeed, of the big five European leagues, only in Spain is a club that does not spend the most on wages primed to win. Still, if Atlético Madrid do clinch la Liga, it will be the first time since 2004 that a club other than the two big spenders, Real Madrid and Barcelona, will have prevailed.
The increasing tendency for clubs to buy success worries UEFA, the body that governs the European game. It has introduced a new set of rules called Financial Fair Play (FFP), under which clubs must move towards breaking even. UEFA hopes this will mitigate against multi-billionaires and sovereign funds buying teams and distorting competition. It also thinks it might prevent clubs with shallower pockets living beyond their means in order to challenge them.
This week, UEFA will announce the result of its audit of clubs’ finances. Reports suggest nine teams have failed the FFP test, including Manchester City and PSG. As part of the transition to break-even, clubs were permitted to lose up to €45m ($63m) during the 2011-12 and 2012-13 seasons. Player sales, matchday revenue, commercial deals and television money all count as revenue; injections of capital from owners do not.
Both Manchester City and PSG have received hefty sponsorship from organisations linked to their backers. City were paid £350m for 10 years’ sponsorship by Etihad, Abu Dhabi’s flag carrier. PSG, meanwhile, are receiving €200m a year from the Qatar Tourism Authority. Such deals are allowed under FFP, as long as the clubs can prove the amount they receive is at the market rate. It seems that UEFA’s auditors have concluded they were not.
Sanctions against the two clubs are likely to include a hefty fine—possibly as much as €60m over three years—and a cap on the wages they can pay. They may also be forced to enter only a limited squad into next season’s Champions League competition. Teams may currently register a squad of 25 players, including eight that are homegrown. City and PSG might be allowed only 21, including those eight. This will mean leaving some expensive assets out of the squad.
Michel Platini, UEFA’s president, has suggested he does not expect any club to be barred from European competition altogether next season, the ultimate sanction that is open to it. Critics say that, for such munificent owners, big fines are a small price to pay to ensure on-field success. Reduced squads may be a nuisance but, with an array of talent to choose from, it will not be crippling. Indeed, some may conclude the gamble of frontloading spending to ensure entrance into the Champions League, with all the financial benefits that entails, has been worth it. When clubs really can only spend what they earn, those that secure entry will be difficult to dislodge. In 2012-13, Manchester City did not even manage to make it past the first stages of the competition, yet still received nearly €30m for their failure. Juventus received €65m just for reaching the quarter finals—mostly in television revenue.
Reports suggest that PSG have taken their punishment on the chin. City, on the other hand, are said to be considering taking the matter further. They should think hard. They have until May 9th to accept whatever measures UEFA have deemed appropriate or appeal to an adjudicatory chamber. It has the power to impose a stiffer sentence, including chucking the club out of next season’s Champions League altogether. Like all gamblers, City must learn when to fold. Particularly when they already have such a fat stack of chips piled in front of them.
Correction: The original picture accompanying this piece was of Khaldoon Al Mubarak, Manchester City chairman, not Sheikh Mansour
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2014년 6월 2일 월요일 오후 10시 42분 53초 UTC+9, gusrlzkzpfn 님의 말:
The economics of shale oil
Saudi America
The benefits of shale oil are bigger than many Americans realise. Policy has yet to catch up
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Frackin’ the Bakken DENNIS LITHGOW is an oil man, but sees himself as a manufacturer. His factory is a vast expanse of brushland in west Texas. His assembly line is hundreds of brightly painted oil pumps spaced out like a city grid, interspersed with identical clusters of tanks for storage and separation. Through the windscreen of his truck he points out two massive drilling rigs on the horizon and a third about to be erected. Less than 90 days after they punch through the earth, oil will start to flow.
What if they’re dry? “We don’t drill dry holes here,” says Mr Lithgow, an executive for Pioneer Natural Resources, a Texan oil firm. In the conventional oil business, the riskiest thing is finding the stuff. The “tight oil” business, by contrast, is about deposits people have known about for decades but previously could not extract economically.
Pioneer’s ranch sits at the centre of the Permian Basin, a prehistoric sea that, along with Eagle Ford in south Texas and North Dakota’s Bakken, are the biggest sources of tight oil, a broad category for the dense rocks, such as shale, that usually sit beneath the reservoirs that contain conventional oil. Since 2008 tight-oil production in America has soared from 600,000 to 3.5m barrels per day (see chart 1). Thanks to tight oil and natural gas from shale, fossil fuels are contributing ever more to economic growth: 0.3 points last year alone, according to J.P. Morgan, and 0.1 to 0.2 a year to the end of 2020, according to the Peterson Institute, a think-tank. Upscale furniture stores and luxury-car dealerships have sprung up in Midland since the boom began. Mr Lithgow has truck drivers who earn $80,000 a year. Local oil-service firms have been known to hire fast-food workers on the spot. In all, the unconventional-energy boom will create up to 1.7m new jobs by 2020, predicts McKinsey, a consultancy.
And that is only part of the story. Another benefit of tight oil is that it is much more responsive to world prices. Some economists think this could turn America into a swing producer, helping to moderate the booms and busts of the global market.
Pioneer is rapidly boosting production. But Scott Sheffield, the company’s boss, worries that in a few years he will run out of customers; America has prohibited the export of crude oil since the 1970s. At $100 a barrel, the price of West Texas Intermediate (the most popular benchmark for American oil) is comfortably above the break-even cost of tight oil. But the prospect of a glut has futures pricing it at $20 less in 2018. “There will be a lot less oil-drilling when you take $20 out of everybody’s margin,” says Mr Sheffield.
Until the early 1970s, America was the world’s largest oil producer and the Texas Railroad Commission stabilised world prices by dictating how much the state’s producers could pump. When Arab states slapped an oil embargo on Israel’s Western allies after the six-day war in 1967, Texas cushioned the blow by allowing a massive production boost.
But rising consumption and declining production eroded the state’s spare capacity, and in March 1972 Texas called for flat-out production. “This is a damn historic occasion and a sad occasion,” the Texas Railroad Commission’s chairman declared. When Arab producers imposed another embargo the next year, prices rocketed. America had lost the role of world price arbiter to OPEC, a cartel dominated by despotic regimes. American politicians tried desperately to curb consumption (for example, by lowering speed limits) and to conserve supplies (by banning crude-oil exports in 1975).
American production declined steadily from a peak of 9.6m barrels a day in 1970 to under 5m in 2008. About then, independent producers began adapting the new technologies of hydraulic fracturing (“fracking”) and horizontal drilling, first used to tap shale gas, to oil. Total American production has since risen to 7.4m barrels a day, and the Energy Information Administration, a federal monitor, reckons it will return to its 1970 record by 2019. The International Energy Agency is more bullish; it reckons that by 2020 America will have displaced Saudi Arabia as the world’s biggest producer, pumping 11.6m barrels a day.
Besides directly creating new jobs and income, the fossil-fuels boom could help growth by reducing America’s vulnerability to oil-price swings, in two ways. First, as production rises and imports shrink, more of the cash that leaves consumers’ pockets when the oil price rises will return to American rather than foreign producers. David Woo of Bank of America/Merrill Lynch notes that America’s petroleum deficit has narrowed to 1.7% of GDP while Europe’s has widened to nearly 4%, which seems to have made both the dollar and the economy less sensitive to oil prices.
The second channel lies in the economics of shale. Oil flows relatively easily through the porous rocks that make up a conventional reservoir, so a conventional well can tap a large area. As a result, the volume of oil pumped each day declines slowly, on average at 6% per year. By contrast, oil flows much more sluggishly through impermeable tight rock. A well will tap a much smaller area and production declines quite rapidly, typically by 30% a year for the first few years (see chart 2). Maintaining a field’s production levels means constant drilling. The International Energy Agency reckons maintaining production at 1m barrels per day in the Bakken requires 2,500 new wells a year; a large conventional field in southern Iraq needs just 60.
This all means that when oil prices rise, producers can quickly drill more holes and ramp up supply. When prices fall, they simply stop drilling, and production soon declines. In early 2009, after prices collapsed with the global financial crisis, Pioneer shut down all its drilling in the Permian Basin. Within six months, output in the affected areas dropped by 13%.
Bob McNally of Rapidan Group, an industry consultant, predicts that America could be “force-marched” back to the stabilising role it played in the 1960s, this time responding to the market’s invisible hand rather than government diktat. Will that work in practice? It may already have done so. Since 2008, the Peterson Institute notes, turmoil in Sudan, sanctions on Iran and declining North Sea output have taken a lot of oil off the market. Without America, which accounted for half of the growth in global output over that period, Persian Gulf producers might not have been able to make up for the loss. Prices could have risen sharply, hurting consumers everywhere. Yet they did not.
Oil firms try not to over-react to short-term price fluctuations, of course. Capital, equipment and labour all cost money, so they try to ramp up production only in response to what they think will be long-term shifts in the oil price.
Frackin’ the Bakken The ban on crude-oil exports hurts producers and makes it harder for America to become a swing supplier. Light, sweet (ie, low-sulphur) West Texas Intermediate already trades at a discount of $8 to Brent, its global peer. That is due mostly to transport and storage bottlenecks in America, but increasingly the export ban makes a difference. In recent decades American refiners have reconfigured themselves to handle the heavier, sour oil imported from Mexico, Venezuela and Canada’s tar sands, leaving them with less capacity for refining tight oil, which is light and sweet.
The oil price at which shale producers break even ranges from $60 in the Bakken to $80 in Eagle Ford, reckons Michael Cohen of Barclays, a bank. If exports yielded an extra $1 to $1.30 a barrel, he estimates that might raise total output by as much as 200,000 barrels per day.
If the ban were lifted, crude-oil exports could start more or less straight away. The necessary pipes and tankers are mostly there already. But the political debate is only in its infancy. By law the president can allow exports he considers in the national interest. Barack Obama has yet to express a view on the ban. Legislators from non-oil-producing states are wary. “For me the litmus test is how middle-class families will be affected,” says Ron Wyden, the Democratic chairman of the Senate energy and natural resources committee.
The main beneficiaries of the ban are the refiners. They buy light, sweet American crude for less than the global price, turn it into petrol and then sell that at the global price. Exports of refined petroleum products are not banned, and have, unsurprisingly, soared.
Defenders of the ban (including, naturally, some refiners) claim that if America exported more oil, Saudi Arabia would reduce its own output. Prices to American consumers would not fall, they say, and might even rise. Historical evidence says otherwise, however. When Congress allowed Alaska to export crude oil in 1995, its west-coast customers did not pay any more for petrol, diesel or jet fuel.
Oil producers would obviously benefit from lifting the ban. So might other Americans, in less obvious ways. A global oil market that fully included America would be more stable, more diversified and less dependent on OPEC or Russia. The geopolitical dividends could be hefty. As Pioneer’s Mr Sheffield notes, “It’s hard to believe we’re asking the Japanese to stop taking Iranian crude, but we won’t ship them any crude ourselves.”
Correction: We said above that higher export prices could raise output by as much as 200,000 barrels per year. We meant per day. Sorry. This has been corrected.
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2014년 6월 2일 월요일 오후 10시 42분 53초 UTC+9, gusrlzkzpfn 님의 말:
The Economist explains
How to make a living playing video games
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IN 1997 Dennis Fong, better known by his online pseudonym "Thresh", became an internet hero when his skills at "Quake", an early first-person shoot-'em-up, won him a Ferrari 328 GTS owned by John Carmack, the programming guru who had written much of the game. Mr Fong (now retired) amassed more than $100,000 in prize money before hanging up his mouse and parlaying his fame into a business empire. He remains famous among avid gamers for proving both that there was an appetite for "e-sports" among the public, and that players themselves could earn a living from feeding it. These days, hundreds of gamers have managed to turn their abilities with games such as "League of Legends" (pictured), "Call of Duty" and "Hearthstone" into a profession. But how does it work?
The road to stardom begins in a plethora of small online tournaments, with prizes of a few tens or hundreds of dollars stumped up by sponsors keen to reach their tech-savvy, committed audiences. Do well in the bush leagues and you may receive an invitation to play in the top flight—tournaments run by companies such as Major League Gaming in America or the Electronic Sports League in Europe, which can attract hundreds of thousands of simultaneous viewers and which boast prize pools in the hundreds of thousands of dollars. Some tournaments are run by the firms that make the games being played. Riot, the company behind "League of Legends", a popular online team game, has stumped up tens of millions to organise and broadcast glitzy competitions designed to crown the best players in the world. As with traditional sports, though, becoming good at video games requires practice—and lots of it. In South Korea, where the sci-fi strategy game "StarCraft" became something of a national obsession in the late 1990s, professional players live in team houses where coaches and a system of earned privileges encourage them to train for ten hours a day or more.
Like all sports, professional video-gaming is an all-or-nothing business. The best players can earn hundreds of thousands of dollars over the course of their careers, from a combination of prize money, salaries and personal sponsorship. Yet most scrape by, spending a few years as journeymen before giving up and pursuing more ordinary careers. But there are opportunities for the also-rans, too. The big tournaments require knowledgeable commentators, which means that personable players can forge a second career explaining what's going on. Up-and-coming players may even be willing to pay by the hour for coaching. Some players become stars on their own, posting regular videos in which they critique the play of others, instruct their audiences in how to get better, or simply discuss the latest gossip.
That is possible thanks to the rise of video-streaming sites, like Twitch.tv and Ustream, which allow anyone to set themselves up as a one-man television show. Indeed, it is the internet that makes electronic sports possible in the first place. As big as the video games industry has become, watching other people play remains a niche interest. But the internet allows people with such interests to find their peers all over the world, and means that catering to the "long tail" rather than the mass market is commercially feasible. MLG's broadcasts, for instance, are watched in more than 170 countries—though many may have only a handful of viewers. Organising that kind of coverage via traditional television would be fantastically expensive, and would require the sorts of audiences reserved for things like football's World Cup (although MLG has begun flirting with ESPN, an American sports network). Broadcasting online is far cheaper, and means that there is no need to convince sceptical and risk-averse television networks that people will indeed watch. Google, for one, seems to think that playing video games professionally has a future. It is rumoured to be in discussions to buy Twitch.tv, which specialises in video-streaming of gaming, for a billion dollars.
RYAN SHIN
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