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October 20, 2006
Baby Oil Is Colicky
As Kash aptly demonstrates, George Will's latest sippy-cup full of economic happy talk isn't fit for polite discussion. One quick thing on oil prices, though: It's good that they're down. But it's not reassuring. The concern with crude is partially its extreme volatility. For only partially explicable reasons, it shot up to absurd heights over the past year. For even less explicable reasons, it's calmed again. And tomorrow? Who knows. This is not a safe resource to be relying on, and it's bad for the American middle class when such a foundational expense can so rapidly and unexpectedly devour their monthly budget.
October 20, 2006 | Permalink
Comments
Funny you should say that - doesn't the Eisenhower and the rest of carrier group arrive at the Straits of Hormuz tomorrow?
Posted by: Andy | Oct 20, 2006 4:12:44 PM
George Will has a point. The economy is strong, inflation is in check, energy prices are low, unemployment is low, interest rates are low......the business environment is fertile. Thank you George Bush.
The Democrats have run negative for the last few cycles and with few negatives on the economy it's "Well, oil is low, but look at the volitility!! Think of the Children!!"
Good luck with that.
Posted by: Fred Jones | Oct 20, 2006 4:36:41 PM
For even less explicable reasons, it's calmed again.
At-the-pump prices for gasoline are, right now, artificially low. Even a wide-eyed semi-innocent like me can guess what's driving that--*cough*midterms*cough*--but we really should be asking why haven't diesel prices dropped accordingly? Most voters drive gasoline-powered cars. On the other hand, most farm equipment, mass-transportation, and freight transportation (i.e. tractor-trailers) operate on diesel. You aren't buying that fuel directly, so you don't experience the sticker shock, and you're less likely to blame the administration for your pricier lettuce or the higher cost of shipping Christmas presents than you would be if confronted with obviously higher gas prices. According to the Energy Information Administration, hurricanes Katrina and Rita destroyed much of the Gulf's refineries; they remain compromised to this day, therefore expect high diesel prices for the forseeable future.
What to make of that? Doesn't the per-barrel cost of oil on the spot market determine gasoline and diesel prices at the pump? So why does gas remain low-priced here while expensive in Europe (even after adjusting for their higher taxes)? And why does it remain low while diesel prices have soared, influencing the cost of just about everything, from groceries to shipping to bus travel to construction?
Thank you George Bush indeed. Keep holding hands with those Saudi pals.
Posted by: litbrit | Oct 20, 2006 4:54:59 PM
$60 a barrel is low?
If I recall correctly, two years ago $50 a barrel was considered high. Indeed, the high cost of crude oil imports is a big chunk of the blowout trade deficit. And if a new floor of $50/barrel was the foundation for a run toi $80 barrel in the last summer, there is no reason to believe that a floor of $60/barrel won't lead to a run to $100/barrel in the summer of 2007 or 2008, given the right push from turmoil in the middle east.
Here's the impact on the economy, profits and stocks, and on the dollar.
September 27, 2004: 4:06 PM EDT by Mark Gongloff, CNN/Money senior writerNEW YORK (CNN/Money) - Here we go again. Just as they did a month ago, crude oil prices are at record highs near $50 a barrel -- a level that makes investors around the world shudder.
...
Posted by: BruceMcF | Oct 20, 2006 5:10:30 PM
Posted by: litbrit | Oct 20, 2006 1:54:59 PM What to make of that? Doesn't the per-barrel cost of oil on the spot market determine gasoline and diesel prices at the pump?
Ummm ... no? As in, not without other factors affecting pump prices?
Its not as if there is an unlimited ability to shift gasoline production into diesel fuel production or visa versa, and so different demand patterns for the different types of fuel ought to be reflected in different patterns in price changes.
It is certainly not surprising for gasoline to decline faster than diesel when the spot market moves from around $80 to around $60 at the end of summer. After all, autumn is normally a high demand period for diesel fuel (both farm and the trucking the Christmas inventory build-up) and summer is a stronger demand period for gasoline.
If you are looking for evidence of a conspiracy by the big oil companies to boost the Republican's prospects on November 7th, you need something other than the different movements in diesel and gasoline prices in September and October to make that case.
Posted by: BruceMcF | Oct 20, 2006 5:45:11 PM
different demand patterns for the different types of fuel ought to be reflected in different patterns in price changes.
Viewed over a longer period than the mere two seasons referred to by this commenter, the recent gas vs. diesel price disparity seems glaring. The seasonal differences in demand (higher gasoline demand in summer and greater diesel demand in winter) have remained fairly constant over the years. Why the price disparity only now?
Furthermore, I was not suggesting that this disparity alone is evidence of a Big Oil election conspiracy. My goodness, not when there are so many other clues apparent to anyone equipped with a flashlight and a compass.
Posted by: litbrit | Oct 20, 2006 5:59:44 PM
Posted by: litbrit | Oct 20, 2006 2:59:44 PM Why the price disparity only now?
How many observations have we had of what happens when big speculative positions are unwound at the end of summer, in conditions of tight refinery capacity? I haven't looked at it in any detail, but I get the impression that the present tightness in refinery capacity is around five years old, more or less, and that Katrina brought its own uptick in that tightness for the domestic US market.
In that period this is certainly the first time that a big summer speculative position had to be unwound at the end of summer. Certainly there is no way to work out the impact of that without knowing who had taken what hedging positions in the gasoline and diesel forward markets three months back.
Furthermore, I was not suggesting that this disparity alone is evidence of a Big Oil election conspiracy. My goodness, not when there are so many other clues apparent to anyone equipped with a flashlight and a compass.
If Big Oil thinks that bringing gas prices down to $2/gallon is going to help the Republicans carry Ohio, they are just throwing their money away. Indeed, if the price of gas was what bought Bush his uptick in approval ratings, its been washed away since then by American blood pointlessly wasted in Iraq.
Posted by: BruceMcF | Oct 20, 2006 7:06:52 PM
Posted by: Fred Jones | Oct 20, 2006 1:36:41 PM
George Will has a point. The economy is strong, inflation is in check, energy prices are low, unemployment is low, interest rates are low......
Job growth is pathetic ... the weakest in any post WWII recovery ... wages are stagnant ... government debt is blowing out ... the trade deficit is blowing out ... debt overseas is blowing out.
If only the election was one dollar one vote, low inflation, weak job growth and stangant wages would balance out. However, there are just more people in the middle-income group than in the high-income group.
Posted by: BruceMcF | Oct 20, 2006 7:10:09 PM
SPOKANE, Wash., Oct. 20 (UPI) -- A University of Washington economic geologist says there is lots of crude oil left for human use.
Eric Cheney said Friday in a news release that changing economics, technological advances and efforts such as recycling and substitution make the world's mineral resources virtually infinite.
http://upi.com/NewsTrack/view.php?StoryID=20061020-044158-9693r
Posted by: Fred Jones | Oct 20, 2006 9:15:17 PM
Constrained resources are prone to volatility. Take caviar and whale bone for example:
http://mobjectivist.blogspot.com/2006/09/pranksters-gallery.html
Posted by: Webster Hubble Telescope | Oct 20, 2006 10:14:30 PM
What's an "economic geologist?"
Posted by: Ezra | Oct 20, 2006 11:54:49 PM
So what, Fred? It's simple economics: if the price goes higher, more oil sources become economically viable, such as tar sands or oil shales, or even coal liquefaction. The question is, how much of a long-term increase in petroleum prices can we withstand without throwing our economy into a tailspin? That's ignoring the broader consequences of producing oil in ways that greatly increases the amount of CO2 released per usable barrel. And I know you want to ignore that one, so I'll just remind you that the time to actually build substantial capacity in those alternative sources is at least several years if not a decade or so, and the costs are enormous.
Meantime, demand from nations like China, to which we are enormously and increasingly in debt, will continue to climb, putting further upward pressure on prices. The twin engines of debt and rising energy costs could easily propel us into an economic perfect storm. (Note that we use more energy per dollar of GNP than most other nations, so our relative position compared to them is that much worse.)
But, or course, we will never actually run out of oil -- and such a claim is essentially meaningless.
Posted by: idlemind | Oct 21, 2006 3:20:30 AM
Hey, it was an interesting article, tha's all.
Get a grip.
Posted by: Fred Jones | Oct 21, 2006 9:11:30 AM
Fred said -
"Well, oil is low, but look at the volitility!!
Who the hell is claiming it's low? It's gone down a tiny fraction of what cheney's energy policy drove it up to, but still far from low, by any stretch of the imagination.
Think of the Children!!
I will thank you. And the huge deficits the shrub has racked up that they will have to pay for.
unemployment is low
Yay, lots of people have shitty little jobs that offer no benifits, pay a drasticly sub-poverty wage and are often transient in nature.
The economy is strong
For whom?
inflation is in check
Really?
interest rates are low
Lets revisit this one after the November election. Nice of them to give us rate hike relief for the election season.
the business environment is fertile
For whom?
I mean, it is for me and likely you too. But realestate related business is almost always fertile.
Posted by: DuWayne | Oct 21, 2006 11:00:07 AM
DuWayne,
The oil market is, if anything, a world-wide market. Between wars in the biggest oil producing areas, hurricanes that destroyed rigs and refineries, the demand from densly populated emerging industrial nations such as India and China, world wide cartels, the notion that Cheney, Bush or any other one factor controls this market is simply stupid.
I guess he made gold go up as well!! (That darn Cheney!)
Posted by: Fred Jones | Oct 21, 2006 12:54:16 PM
Posted by: Fred Jones | Oct 21, 2006 9:54:16 AM ... Between wars in the biggest oil producing areas, ... the notion that Cheney, Bush or any other one factor controls this market is simply stupid.
I certainly don't think the Bush regime (Rove/Cheney etc.) dictate the price of oil, but it seems to be pulling an awfully long bow to use wars in the biggest oil producing areas as evidence of that their influence is limited. Indeed, their boneheaded foreign policy and expectations among speculators that worse was to come would seem to be one of the main things driving crude oil up to $80/barrel, 33% above the new baseline of $60/barrel (itself 300% above the mid 90's baseline of around $20/barrel, for those keeping score at home).
Posted by: BruceMcF | Oct 21, 2006 1:23:08 PM
Ezra,
If you think the reasons for lower oil prices and lower gas prices are inexplicable, I urge you to read this column by Dan Gross.
I know you have a new confidence in conspiracies, but I hope you will use your strong judgement and analytical skills in discerning in which ones you believe. I have high confifidence that you will.
http://www.slate.com/id/2150903/?nav=tap3
Posted by: tomboy | Oct 21, 2006 3:12:50 PM
WOW typos!!!
Posted by: tomboy | Oct 21, 2006 3:17:31 PM
Fred -
To echo Bruce, using wars in the middle east as an example is silly. Who took us to war in Iraq? War was a signifigant part of Cheney's energy policy. Look at who has profitted from the chaos in the middle east. Where their is chaos and oil, means huge profits for the oil industry. Katrina was just a bonus for the energy giants.
Certainly oil is an international market - but who holds the power over that market? What currency do most oil producers trade in?
I would never claim that the executive branch carries some omnipotent power over the markets but they can and have influenced them. What the policy actually is, no one really knows because the meetings to formulate it were secret - and no one will go under oath to talk about any of it. But if you look at who has benifitted from the decision to go to war and occupy Iraq, it is easy to see what part of that energy policy is. If you look at all the massive tax breaks and breaks on paying oil leases for public (as in that land belongs to us) it gives you an inkling of what it might boil down too. I.e. give them all the incentive to lower the price and they still double the price of gas from where it was when bush took office. Whoo boy! It conmes down a tiny fraction, right when the republicans are desperate - it will be interesting to see where they go after the elections.
Posted by: DuWayne | Oct 21, 2006 8:20:38 PM
Who took us to war in Iraq?
Ummmm.....68.5% of the House and 77% of the Senate?
In 2004 both Kerry and Clinton said that they had no regrets in oting for war. Ask me and I will provide the links.
So, who took us to war? The Senate did by voting on existing intelligence, the same intelligence the President had. The House did. Ultimately, Saddam did by stiffing the world and not addressing it's grave concerns about WMD.
Posted by: Fred Jones | Oct 22, 2006 8:35:52 AM
In 2004 both Kerry and Clinton said that they had no regrets in oting for war.
Good lord Fred, you seem to forget, I could care less what the dems do - I am not a dem and want to see that party disbanded as badly as I want the repubs gone.
The Senate did by voting on existing intelligence, the same intelligence the President had. The House did.
They voted for war, based on the intelligence that the president and vice president made sure they would have and nothing that would indicate war might not be necessary.
Ultimately, Saddam did by stiffing the world and not addressing it's grave concerns about WMD.
What? You mean like allowing the weapons inspectors in? They were there, on the ground, until just before the invasion when bush pulled them out.
What about the rest of the points in my original comment?
Posted by: DuWayne | Oct 22, 2006 10:37:48 AM
Ummmm.....68.5% of the House and 77% of the Senate?
Bzzzzzz, wrong answer! Care to try again?
Posted by: Col Bat Guano | Oct 22, 2006 2:42:31 PM
Hi, I've studied historical oil prices for work and for school, and the reality is that since the 70s, oil prices have always been volatile. That's the reason energy costs are left out of the CPI.
When oil prices are high, as they are now, people seem to be more concerned with volatility. But really, they should be most concerned when oil prices are low, as in 1998 when it got down to $10 a barrel.
If people were able to look at oil rationally, in 1998 they would have thought that $10/bbl is really low and the price of oil is bound to increase unless by some weird magic, oil has suddenly become unvolatile. I'm sure some did. Southwest famously locked in low jet fuel futures just before oil swung up, giving it a huge competitive advantage over many of its competitors. But even well-trained economists and analysts at the time made forecasts that predicted oil not exceeding $25/bbl for the next 10 years.
What I'm saying is that I don't think volatility really enters into the calculations of the average consumer. Oil makes their lives no more uncertain now than it has been at any time since 1970. If there is additional risk and uncertainty for consumers, it's because of things other than oil prices.
I fully agree, however, that we shouldn't depend on oil for so much of our energy for environmental, economic and political reasons. I think we need to have the will to act now, because if as happened in the past (1980-1986, 1991-1994, 1996-1998, 2000-2001) the price of oil drops significantly, there will be less political will to take serious action on alternative energy sources, conservation, efficiency, etc.
Posted by: RWB | Oct 22, 2006 6:11:02 PM
Posted by: RWB | Oct 22, 2006 3:11:02 PM If there is additional risk and uncertainty for consumers, it's because of things other than oil prices.
With more consumer spending financed by debt and debt to household income ratios climbing high, we ought to expect people to be more sensitive to volatility when they experience up ticks ... that is, the more household income is already dedicated to debt payments, the less leeway there is in the budget. And in most recoveries, recent pay rises are a source of budgeting leeway for many people, but in the present recovery we are seeing very little increase in median household income, after inflation.
Posted by: BruceMcF | Oct 22, 2006 6:26:23 PM
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