Sunday, January 27, 2008

The other shoe.

I'm moving next weekend, so starting tomorrow, I'm keeping the posts short and may have a few days off from blogging after next Friday.

Friend of the blog Distributor Cap wrote a very good post talking about the economic stimulus plan coming our way, thanks to some powerful bipartisan stupidity being practiced in Washington D.C. right now. Here's my own two cents on the situation, which given the strength of the dollar is not much of an investment at all.

I reviewed Kevin Phillips' American Theocracy back in December, a well written and comprehensively researched book from 2006 with a bad title. The GOP's attempt to become the Party of God™ (name trademarked internationally by Hezbollah) is only one third of the book. The other two parts are prophetically two of the major headlines of 2008, the price of oil and the massive debt that has been assumed by Americans at all levels, government, industry and personal.

So now the word recession is being thrown around by nearly everybody, except Fred Thompson who still thinks the American economy's story of the past seven years is "the greatest story never told." Like Distributor Cap, I'm worried about this economic stimulus plan that Nancy Pelosi thinks is so wonderful. We can't find a few billion to fund the children's health insurance, Bush tells us, but somehow we will find the $150,000,000,000 (one hundred fifty billion dollars written longhand for effect) for this $600 party for every adult, $300 party for every kid and unspecified amount party for every corporation. How will the government pay for this bailout? By going into more debt, of course.

So we have a debt crisis, fueled by low interest rates and idiot borrowers and lenders. The government's solution is to lower a major interest rate by three quarters of a point and then lead by example by going into even more debt than usual this year, and this is an administration who loves spending more money than it has, no matter who is in Congress. (Why should the executive get the lion's share of the blame right now? Hint: wars cost money.)

This is analogous to solving the crack epidemic by lowering the price of crack.

But then there's the other side of the economic mess, rising prices due in large part to the incredible increase in the price of crude oil in 2007. Let me get a little math-y about this. Here are the rough average prices for crude oil for the spring, summer and fall of last year.

Spring 2007: $66 a barrel
Summer 2007: $74 a barrel
Fall 2007: $91 a barrel

The percentage increase are as follows.

Spring to Summer: 12% increase
Summer to Fall: 23% increase
Spring to Fall: 38% increase

So the average price of crude increased about 38% in six months. (I say "about" because I'm taking the average of several semi-random data points from each three month period, not the average of every day's ending price.) Here's the thing. The oil companies are being nice. They haven't passed on all that price increase to consumers. When it comes to aviation fuel, they squeezed relatively hard. Aviation fuel, like gas, doesn't have the same exact price everywhere in the country, but the industry index shows that the last six months has seen a 29% increase. In other words, a large part of the increase the crude oil prices was passed on to the airlines, who in turn passed it on to the passengers.

This slightly confusing graph above shows price of gasoline for the nation in red (5% increase in six months) and the price in San Jose in blue (8% increase) with the scale for those prices on the right. The green squiggle is the price of crude, with the scale for that price on the left side of the chart. (Point to point shows only a 21% increase, not the 38% increase I discussed above. This is because I compared quarterly average to quarterly average instead of one particular day's price to another.) In either case, the past six months have seen a less than 10% increase in gas prices for the consumer. Why the spasm of altruism from our friends at BP, Exxon, et al.?

Here's my best guess. Lotsa people aren't that good at math. What they notice is the flip from $2.99 to $3.00, the big threshold changes. Three dollar gas got the attention of a lot of drivers, who decided to make changes in their habits. The gas companies have had it great for a long time, as sellers of an addictive product often do. The price goes up, and as a market, we whine a little but buy just about as much as we used to. The last thing they want is for us to wake up and pay attention. If the price increase for gas when up directly with the green squiggle, folks in the Bay Area would be shelling out $3.70 a gallon right now, and the country would average about $3.39 a gallon. If the increase was the 38% increase seen in the quarterly averages, the Bay Area would be paying $4.21 a gallon and the national average would be about $3.86.

The four dollar a gallon threshold will definitely be another wake-up call.

As I always say whenever I post a picture of the scary vibrating screaming woman (click on the pic to see her quiver), Holy Shucking Fit!

Time to pull back from the brink. If you are one of those people who can afford to tighten your belt, count your blessings and do the right thing. There's a lot of signs out there, and none of them look very promising.

Yay, Flags of many lands™! Yay, Tunisia!
What would cause a person from this devout Islamic state to wander over to Lotsa 'Splainin' 2 Do?

Did you guess giant women? Give yourself a cookie. Lotsa visitors from Islamic lands believe Allah is Great, but a fifty foot tall Anita Ekberg is pretty cool, too.

That's lotsa 'splainin'. Glad it's a Sunday.

Now playing: Talking Heads - Don't Worry About The Government
via FoxyTunes


Distributorcap said...

between you and I will we have a bunch of Keynes running around the blogs


as for oil -- you cant leave out the fact that as the prices rises we are transferring more and more wealth to a few countries -- most of which are not democracies, nor do they have the ability to absorb all those dollars.

also the price of oil is not subject to total free market changes -- as it is a cartel that sets the price and the production quotas. what OPEC has to fear more than anything is that the price gets to a point where it becomes feasible to use other sources of energy

you would have thought that it would haved happenede by now -- but not when you have 2 OIL men running this country with vested interests in keepin the pumps of Saudi Arabia going -- and oil is too easy and too convenient -- so it is as if the price is elastic (or non-elastic).....but that is a whole other story

dguzman said...

I'm predicting $4/gallon by summertime. Thanks for more 'splainin Matty Boy.

jolie said...

back during the oil embargo days of the 70s, my dad, a petroleum engineer who worked his whole life for gulf oil, said we needed to pay what it really cost for that gas at the pump, which he said should be $2. I remember thinking, damn, that's a lot of money!

so, if we really did pay what it cost (or updated the real cost of $2 from 35 years ago) from then to now, where would we be today? would we drive electric cars? would CAFE standards have been introduced sooner & been tougher? would the hummer ever have been produced for non-military use? and on and on ...

no_slappz said...

There's some truth to dcap's claim that oil supplies are restricted by those who control the real estate under which it is found.

Like the US Congress.

There are 80 billion barrels of untapped domestic reserves. The goods are located in Alaska and in our coastal waters.

If we began taking oil from those reserves, world oil prices would drop. At the same time, more US oil workers would earn big paychecks to provide this valuable resource to our economy.

That aside, you need some lessons in oil company financial realities.