ACAI Booster Shot #4: How Many Litres in a Barrel? - What to Know and What Not to Know
In mid-2008, as the global financial crisis was building, crude oil came within a few dollars of $150 a barrel. A few of us sat in the office canteen, expressing our horror at the number.
One colleague, well known for his aggressive bluntness, snapped at us. "You people don't even know how many litres go into a barrel, and you are discussing oil prices. Get your facts right first, then talk."
For the record, a barrel holds about 159 litres. Knowing that would not have changed a word of our conversation.
That exchange has stayed with me, because it raises a question every leader faces in a day of information overload: what to know, and what not to know.
He was wrong, and a little bit right
He was wrong because we had reached a sound conclusion without that fact. We knew the direction: oil was far above where it had been. We knew the velocity: it had got there quickly. Together, direction and velocity told us what was coming for fuel bills, airlines and inflation. The size of the barrel added nothing.
He was a little bit right because it is always good to know. The trouble starts when "good to know" becomes "must know before you are allowed to speak".
Every leader runs on benchmarks
Indexes and benchmarks reach well beyond financial markets. A stock index, an oil price, a policy rate, an inflation figure, a credit rating, a market share number, an attrition rate. Each one compresses a great deal of complexity into a single figure so that we do not have to study the detail. Nobody has the bandwidth to do otherwise, and that is the value of a benchmark.
The same convenience is the risk. A number followed blindly, with no idea of what it stands for, leads to false conclusions. It is a double-edged sword.
One commodity, two prices
The oil price from my canteen story is a good place to start, because there is no single oil price. WTI is the benchmark for crude in the United States. Brent is the reference for most of the oil traded in the rest of the world. On most days the two move together, a few dollars apart.
On 20 April 2020 they did not. WTI closed at minus $37 a barrel, and headlines announced that oil had gone negative. On the same day Brent stood at around $25. A leader outside America who took that headline at face value drew a false conclusion about fuel prices.
What the headline leaves out
The same gap between the name and the reality shows up wherever a single number is quoted.
The Dow Jones is one of the most quoted indices anywhere. It tracks just 30 American companies.
MSCI World sounds like the whole planet. It covers developed markets only, so China and India are not in it.
A central bank rate is not the rate on your loan. The US Federal Reserve raised its rate in September, and yesterday the RBI raised its repo rate by 25 basis points. In India, a home loan linked to the repo rate reprices almost fully within about three months. In the US, a 30-year fixed-rate mortgage that is already running does not move at all.
An industry average for margins or attrition is an average of businesses that may look nothing like yours.
What a rate hike does tell everyone is direction: money is getting costlier. Whether one hike is followed quickly by another is velocity, and velocity shows how worried the central bank is.
What to know
For any headline number, three things are enough to discuss it sensibly.
Coverage. What does the number include, and what does it leave out? Thirty companies or the whole market? A policy rate or the rate on my own loan? What does a movement ultimately impact, and when?
Direction. Compared with where it was, is it up or down?
Velocity. How fast is it moving? A slow drift and a sharp run to the same level mean very different things. Crude at $150 alarmed us largely because of the speed of the climb.
What not to know
How the number is calculated, with its weightages and fine print, matters a great deal to specialists who work in that market. For everyone else, it is just like the litres in the barrel.
The takeaway
No leader can know everything, and none needs to. When a headline number reaches your desk, ask about coverage, direction and velocity before you react, or before your team does. Leave the construction to the specialists, and know when to call one.
And if someone at the table demands to know how many litres are in a barrel, you may wax philosophical about the barrel being half full or half empty, and then carry on with the discussion.
