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Saturday, February 23, 2013

Inflation: gasoline prices

Now, this should not be considered a response to Nate's post on inflation, as it is not an integral part of the great inflation-deflation debate, but rather tangential to it.  It is simply an off-shoot of some research I was doing that is not going to be part of my core argument.  But I'm posting it nevertheless because it is interesting and should help put in context precisely where we happen to be at the moment with regards to recent price movements.  We could, of course, use CPI, but I don't pay much attention to it since with all of its hedonic adjustments and so forth, I regard it to be as about as relevant to reality as the average science fiction novel.  And while I am very well aware of the various shortcomings of using a commodity price such as gasoline as an inflation metric, given the inevitable effects of supply and demand, it nevertheless can be readily observed that the price of gasoline is an even more "inflationary" one than than simply relying upon CPI.  Which is to say, using gasoline as a metric instead of CPI will tend to be a more favorable one to the inflationary case for those contemplating the inflation/deflation question.

To the best of my knowledge, the price of gasoline was $0.12 in 1913.  Another reference cites $0.25 in 1918, but I will go with the lower and older one as it is less favorable from the perspective of my deflationary position.  Utilizing the CPI, this provides an estimated equivalent price of $2.79, which is much lower than the current national average price of $3.74.

Now, given the massive amount of M2 money creation that has taken place since the financial crisis hit in Q3 2008, we would expect that at least an amount of that $3.62 increase in price per gallon has taken place since then.  But look at the 60-month history of gasoline prices, which actually fell dramatically in the first six months post-crisis, from $4.12 at the onset of the crisis to $1.61.

Prices have gradually worked their way up since then, but from an inflationary perspective, things have remained essentially flat over the last five years, which the observant reader will recall tends to be considerably more in line with the flat state of total credit market debt outstanding than with the continued expansion of M2.

Please note that I am not claiming that this proves anything yet, I am simply pointing it out to counteract the common assumption that price inflation is as rampant as it is presently perceived to be due to gasoline prices threatening to return to their previous all-time highs.

Labels:

74 Comments:

Anonymous trk February 23, 2013 9:20 AM  

do you think the price of gasoline would fall given a reduction in outstanding debt? By reduction I mean a hike in interest rates and people/gov paying down debt.

Anonymous Krul February 23, 2013 9:20 AM  

That chart is interesting. Just what happened in 2008 to cause that crater? Whatever it was, we could use another one...

Anonymous jack February 23, 2013 9:27 AM  

Krul February 23, 2013 9:20 AM

That chart is interesting. Just what happened in 2008 to cause that crater? Whatever it was, we could use another one...

Could it be sudden lack of demand due to lack of available funds to buy the product?
Can any product such as gas be detached from the law of supply and demand by government fiat? And, that detachment made to work somehow over the long run?
If demand is way down and going lower due to increases in price where the heck is all the shipped crude being stored?

Anonymous trk February 23, 2013 9:33 AM  

the price of crude is heavily influenced by futures trading. I would guess that after an all time high, someone /some large entity decided to get out of crude thus resulting in a massive sell off.

Anonymous Lulabelle February 23, 2013 9:37 AM  

"Utilizing the CPI, this provides an estimated equivalent price of $2.79, which is much lower than the current national average price of $3.74."

How did you utilize the CPI? Did you take an average of the indexed adjustments for the time period from 1913 onward......(was the CPI even calculated back then?).....or were the figures calculated year by year to arrive at the $2.79? I'm not doubting your math, I'm just curious.

Anonymous VD February 23, 2013 9:40 AM  

How did you utilize the CPI?

Look up The Inflation Calculator. That's what it's made for.

Anonymous LES February 23, 2013 9:57 AM  

Retail gasoline prices include a lot of taxes

Anonymous Lulabelle February 23, 2013 10:00 AM  

"Look up The Inflation Calculator. That's what it's made for."

TY.

Anonymous JI February 23, 2013 10:01 AM  

Huh. Why is this? Is the increase in money just sort of sitting somewhere, not percolating throughout the economy? Or does it just take awhile for the effect to be felt? I mean, there has clearly been price inflation over the past 5-10 years.

Blogger Positive Dennis February 23, 2013 10:03 AM  

As Vox points out the CPI is not particularly valuable. I offer for your consideration the PDI, the Positive Dennis Index. We have lived for quite some time on a household budget of "x". My wife informed me that we are out of money for the month. There is one week left in the month. Prices are rising. Btw it is not her, she is better with money than me.

We are in the fortunate position that we can raise the budget, most people are not.

As for the inflation/deflation debate, I would say it depends on who is president when the next crisis occurs-and how big the crisis is. Donning my Yoda mask, I predict suffering.

Anonymous Lulabelle February 23, 2013 10:04 AM  

"I predict suffering. "

.......Suffering, I predict.

There, fixed it for ya.

Blogger IM2L844 February 23, 2013 10:10 AM  

Didn't that dive in gasoline prices occur directly after the U.S. announced it would suspend all purchases for the Strategic Oil Reserves?

Anonymous VD February 23, 2013 10:24 AM  

First, that was January 2009. It's been pretty much full ever since, except for one drawdown in June 2011.

Anonymous Porky February 23, 2013 10:25 AM  

Speculators have become less speculative.

Blogger IM2L844 February 23, 2013 10:31 AM  

Doesn't the CPI abuse the concept of utility? I mean that while I may be able to go to Wal-Mart and purchace a generic pair of jeans or tennis shoes cheaper that I could purchase a pair of Levi's or Adidas in the past, I can't purchase the same pair of Levi's or Adidas for the same price that I purchased them is the past.

Anonymous Anonymous February 23, 2013 10:35 AM  

I remember that. His excellency Barack Obama honorable mention got the nomination, Johnny Mac suspended his campaign, Bush put Bernanke in charge, the House was made to vote until they got it right, and contract work, outsourcing, and business spending collapsed for 12 months. His excellency is working on a repeat.

-- Mr Green Man

Anonymous Josh February 23, 2013 10:35 AM  

Huh. Why is this? Is the increase in money just sort of sitting somewhere, not percolating throughout the economy? Or does it just take awhile for the effect to be felt? I mean, there has clearly been price inflation over the past 5-10 years.
New money that is created has to be lent into existence by banks to borrowers that the banks deem credit worthy. If those borrowers don't want to borrow, or if those who do want to borrow aren't credit worthy, no new lending, no new money creation.

Blogger IM2L844 February 23, 2013 10:37 AM  

On May 16, 2008, the U.S. Department of Energy said it would halt all deliveries to the Strategic Petroleum Reserve sometime in July. On January 2, 2009, the U.S. Energy Department said that it would resume purchases. This seems to correlate with the chart pretty well.

Anonymous Josh February 23, 2013 10:42 AM  

On May 16, 2008, the U.S. Department of Energy said it would halt all deliveries to the Strategic Petroleum Reserve sometime in July. On January 2, 2009, the U.S. Energy Department said that it would resume purchases. This seems to correlate with the chart pretty well.

Or...maybe the DoE decided to stop purchasing oil in May 2008 because the price was so freaking high...and then resumed purchasing oil once the price collapsed...

Blogger Ashley February 23, 2013 10:46 AM  

@VD: I read The Return of the Great Depression and found the arguments for deflation unconvincing. (I did really like the comparative discussion of different schools of economics and the history of distortion of economic indicators--despite the fact that I was already familiar with John Williams/Shadowstats.) FOFOA presents the best hyperinflation thesis I've found. These posts are the best place to start, but there are several more on the topic that are also very good:

http://fofoa.blogspot.com/2011/04/deflation-or-hyperinflation.html
http://fofoa.blogspot.com/2012/05/inflation-or-hyperinflation.html

I'd be interested to hear your take on the Freegold thesis outlined by FOFOA as well.

Blogger IM2L844 February 23, 2013 10:55 AM  

Or...maybe the DoE decided to stop purchasing oil in May 2008 because the price was so freaking high...and then resumed purchasing oil once the price collapsed...

That could be. I've never tried to hide my shallow understanding of economics. I'm looking to have my misunderstandings corrected where needed. I can only help facilitate that by highlighting the way things "seem" to me.

Anonymous Josh February 23, 2013 11:14 AM  

I can only help facilitate that by highlighting the way things "seem" to me.

Your assumption was certainly reasonable, especially given the correlation.

Anonymous Roundtine February 23, 2013 11:26 AM  

Consider that newly created Fed money tends to flow into commodities. (New money can flow anywhere, but it tends to flow unevenly and into speculative and hard assets first.)

Anonymous Josh February 23, 2013 11:37 AM  

http://www.rollingstone.com/politics/blogs/taibblog/wikileaks-cables-show-speculators-behind-oil-bubble-20110526

Taibbi on the oil bubble.

Blogger Kentucky Packrat February 23, 2013 11:54 AM  

Around 2008, the oil market was going through some serious distortions. The oil market was overbought, with people storing crude in tankers that hadn't moved from their berths in years. All of the sudden, trading houses need money NOW, and the supply of oil goes through the roof just as demand starts heading down.

The key to this market is that most big-ticket items, most items of clothing, and luxuries (iPhones, water heaters, stoves, etc.) are stagnant to going down (excluding maybe the highest end). It's food and gas that's going up. I used to joke about the baked bean index. Wal-Mart has kept the same large can of Bush's baked beans that is now 1.98 a can, at the new "best price". When I started noticing prices going up, it was establishing a new top at $1 a can.

Also, until farmers started dumping animals on the meat market, meat was up 50-70% this year alone. Hamburger went from around $2 a pound (80% chuck) to $3.50 or so a pound. It's back down now, but that is a temporary non-monitary distortion that will overcorrect when there's a deficit later this year (my father is already seeing the wholesale market price correct in beef).

It's simplistic to say that the problem is all monetary in food prices (a lot of the distortion caused by corn getting poured into cars), but IMHO it is there.

Anonymous Cobre February 23, 2013 11:55 AM  

Price action had nothing to do with the SPR. The SPR holds about 700 mm bbl. Not all of that is light crude which is the barrel used to refine gasoline. Domestically we used about 19 mm bpd in 2008. So the quantities that the government was purchasing were drops in a bucket of the global 80+ mm bpd market. Note that the summer 2011 SPR release of 30 mm bbl had very little impact on price. These are tiny amounts in the grander scheme.

There's a lot to think about with oil and gasoline pricing. I think Vox noted that to show that this isn't perfect. The speculator position is silly. I've commented on that here before at length. People forget that it's a bilateral market with swaps. There are two counterparties, so someone is always short. Craig Pirrong has done a lot to show the math on why this populist idea is flawed and I'd encourage a google of it.

Price is driven largely by supply and demand from a global perspective. Where there is transportation, there's little opportunity for arbitrage and barrels are flat worldwide in general. Crude spreads globally (say Brent to WTI) can be wide due to variables in extraction costs and geopolitical tension, but historically they're relatively tight.

This is also important because it affects gasoline prices. What you see for the NYMEX price is not what is paid for a waterborne cargo to Gulf refineries (see LLS/WTI swap prices to view that spread). When the premium is high as it has been since the Arab Spring, your refiners pay more for the crude input than they would for a Cushing barrel. This is why the peak of $147 crude brought us $4.165 gasoline in 2008, but we're now pushing $4 on $95 crude. One could argue that our loose monetary policy catalyzed this development.

Another issue is stimulus... the 2% tax holiday from 2011/2012 represented about $1,000 annually for the median household. That kind of additional cash probably got in the way of organic demand destruction. Only time I've ever been against a tax cut because we borrowed for it and it was a trade-off for more spend. If only the twits in DC knew that they just subsidized oil with that cut indirectly... but I digress.

As important as anything in this discussion is the bottlenecking caused by decreased refinery capacity in recent years. That's probably the biggest taint on the discussion of gasoline as a proxy for inflation.


@LES, correct on the taxes. Ball park about 24-30% over spot prices.

@VD, I would prefer to see a 200-day moving average to smooth out those peaks. The left of your chart is taken from a high which was relatively short-lived. I'm on a train and don't have my laptop with me, otherwise i'd do it myself or do a 39-week MA off the EIA weekly retail data to approximate the same market movement. High prices are self-correcting because producers hedge the peaks and tend to fund their future production during the lean times which historically have always come because of demand destruction and addition supply driven by the higher prices (coupled with tech improvements for exploration and operational efficiences). 'Tis the nature of E&P.

Anonymous Anonymous February 23, 2013 12:30 PM  

I remember "gas wars" in the mid to late 60's, and paying 25 cents a gallon to fill the Camaro. Then came the "gas crisis" in the 70's.

Gas prices have been a policy toy for a long time.

Anonymous BillB February 23, 2013 12:46 PM  

During my first years of driving, gas was 26.9/gal and often sold for 19.9 when there was a gas war. The time was right around 1966-1970.

So gas today should run around $1.57 based on those costs.

There is more fuel consumption around the world today and so s&d kick in but we are still being screwed. Add fed and state taxes to the devaluation of the buck and here we are. Then add ethanol which contains roughly 3/5 of the energy per gallon as does gasoline and you have to use more. Follow that with the fact that ethanol also breaks down in storage through oxidation to form aldehydes and vinegar which really help an engine.

Anonymous Anonymous February 23, 2013 12:54 PM  

FWIW, using the peak of the bubble which popped in 2008 as the baseline for inflation doesn't make a whole lot of sense.  Try 2003, before the runup.

That chart is interesting. Just what happened in 2008 to cause that crater?

It was a massive financial collapse as the bubble popped, leading to a collapse in demand (because people couldn't afford fuel).  OPEC brought the price back up by restricting supply.

Whatever it was, we could use another one...

Be careful what you wish for.

What you really want is to be able to use natural gas as motor fuel, you just don't know it yet.  A gallon-equivalent of natural gas costs less than 50 cents at the Henry hub right now.  Every hundred cubic feet of natural gas burned in a vehicle displaces nearly a gallon of imported crude oil; if there is a patriotic fuel to burn, natural gas is it.

Anonymous The other skeptic February 23, 2013 1:17 PM  

OT: All is not well in the Kingdom of Diversistan

Anonymous Orville February 23, 2013 1:32 PM  

To add additional noise to the signal, shale oils are coming on line now to the extent that storage, let alone pipelines, are becoming a huge problem. The Cushing complex is full from reports I read, but the biggest kink in the supply line are the limited number of refiners. No new refinery has been built in over 30 years.

Anonymous DrTorch February 23, 2013 1:33 PM  

Why not use MIT's Billion Price Project?

Anonymous Orville February 23, 2013 1:36 PM  

With all the various possible blends of gasoline, and limited capacity to produce, I think that gasoline price is too subject to shocks to use as a reliable inflation gauge. Every time a refinery goes down for extended maintenace (these are old facilities) or gets damage from a hurricane (most are in that zone), the price of gasoline goes up. Those two factors have nothing to do with inflation.

Anonymous Anonymous February 23, 2013 2:02 PM  

The problem is not a lack of oil refineries.  There is more than enough refining capacity, and some types of refinery are going out of business because there isn't enough feedstock for them.  The East coast refineries which specialize in light, sweet crude feedstocks are going bust.

The Gulf Coast refineries took advantage of cheap Venezuelan heavy/sour crude years ago, and built the hydrodesulfurizers and cokers to handle it.  They now find themselves perfectly situated to take advantage of Canadian bitumen from the tar sands.  This is why Keystone XL means so much to them.  It doesn't matter to the Canadians; the Chinese will buy anything we don't want.

Since it's a seller's market in most places (outside the pipeline-short areas like N. Dakota, where rail transport can cost $15/bbl), oil refining is mostly not a high-margin business.  Adding more refineries will not bring prices down, because the problem is that there is no more cheap oil to be had.

Anonymous DonReynolds February 23, 2013 2:02 PM  

Thus far, I have yet to hear the Obamba tribe begin to chant for Federal wage and price controls. This does not mean they are Libertarians or have great faith in the ability of free markets. Quite the opposite. The Obamaites have hinted regularly that the marketplace is unjust and unfair in the distribution of incomes, rents, wages, and profits. They very desperately want to redistribute wealth and income.

At some point, they will ultimately move beyond merely subsidizing purchases with public money for favored individuals....and this will mean killing the goose that lays the golden eggs in the hope of obtaining all the eggs that the goose is hoarding in its body. Hopefully, all the geese will act before that time arrives..... either by flying away or using their golden eggs to hire LIONS to protect them.

Anonymous Porky February 23, 2013 2:06 PM  

The traditional speculators are not the problem. It's the commodity indexers. They enjoy almost unlimited positions, less regulation, loopholes, exemptions, less risk, and they are way more volatile and exert more than twice as much price pressure than the speculators.

Guess which 4 banks own 70% of these contracts and you'll understand why they have been given so much freedom under the current administration. :)

Anonymous The other skeptic February 23, 2013 2:20 PM  

OT, but it looks like the race war has started with black on hispanic attacks in Texas and hispanic on black attacks in SoCal.

Anonymous DonReynolds February 23, 2013 2:20 PM  

Many of the comments here regarding petroleum refineries in the USA are well informed and knowledgeable. What I did not see mentioned was our critical vulnerability to disruption. It used to take eleven years to build a refinery (four years longer than to build a nuclear power plant). I suspect under the Obamba EPA, the new rules against fossil fuels will make the building of new refineries almost impossible. And I hasten to add, that if all of the refineries ceased to operate (for whatever reason) in the morning, we have almost zero capacity for maritime transport of refined product from foreign refineries. It simply does not exist except for a few ships that supply our military forces around the world where local supplies are not available.

This simply fact convinced me on September 12th that the terrorists were not at all serious about inflicting damage on the United States. Twenty suicide terrorists would have done much more damage had they attacked the refineries around the country instead of the intended targets of 9-11 and the effect would have been much more profound than any attack on NYC. Refineries are like paint factories, they burn well.

Anonymous Anonymous February 23, 2013 3:11 PM  

if all of the refineries ceased to operate (for whatever reason) in the morning, we have almost zero capacity for maritime transport of refined product from foreign refineries.

The USA has long exchanged refined products with Europe; the US appetite for gasoline produces an excess of diesel, and the European appetite for diesel produces an excess of gasoline, so tankers regularly ply the Atlantic with diesel flowing east and gasoline flowing west.  US diesel prices are so much higher than gasoline because ultra-low sulfur diesel sells at a premium on the international market.  There is a LOT of trade in refined products, and tankers can easily run product in the opposite direction... if there is any to be had.

If you really want energy security, the choices are natural gas or electric.  I have a plug-in hybrid car on order, expecting delivery in about a month.

Anonymous Orville February 23, 2013 3:13 PM  

Agree, but Constitution destroying Patriot Acts, NDAA and a continuous "state of emergency" has actually done far more damage than if all the refineries were destroyed. Which begs the question of who benefits? Outside parties would benefit more from the economic destruction of refineries, while internal parties would benefit more from not having a pesky constitution gumming up their police state.

Anonymous The other skeptic February 23, 2013 3:26 PM  

If you really want energy security, the choices are natural gas or electric. I have a plug-in hybrid car on order, expecting delivery in about a month.

Both of which depend on distribution systems that are targets and potential failure points in an emergency.

Perhaps you should get a bolt-on wood gasifier.

Blogger Positive Dennis February 23, 2013 3:44 PM  

Or a modest solar array.

Anonymous alexamenos February 23, 2013 4:26 PM  

Whatever has been driving oil prices over the last decade is also driving gold prices, which are extremely highly correlated over a long period of time (like r-sq greater than 85% correlated). Oil today is running about 0.06 barrels / ounce of gold, versus 0.07 ounces a decade ago, and 0.08 ounces 50 years ago.

Point being, has the price of gold gone from $400 to $1,500 an ounce in the last decade because of changes in the supply and demand fundamentals for gold, or is this more likely a reflection on the value of the Bernanke Buck?

If gold is going up because of depreciation in the value of the Bernanke Buck, then I believe it stands to reason that dollar denominated price of oil is going up for the same reason.



Anonymous Anonymous February 23, 2013 4:31 PM  

Apparently my previous comment was too long, off topic, or it simply didn't post, so in this one I'm going to keep things as short and sweet as possible.

Skipping the detailed analysis I suggest people consider the following....

2010 - 3,297,528,000 barrels x 42 = 138,496,176,000 gallons

http://americanfuels.blogspot.com/2011/02/2010-gasoline-consumption.html

Multiply the gallons by the dollar which Vox pointed out, and I agree with, represents the difference between the historical price and today's price and the answer is obviously a bit over 138 Billion dollars.

That is the amount of money being sucked out of the economy by the higher prices for energy, much of it going to foreign countries representing an even greater loss to the US in consumer discretionary spending. Of course, the President's policies are no help, but one can only guess what the economy would be doing if that money was circulating here at home.

Anonymous Noah B. February 23, 2013 5:19 PM  

"To the best of my knowledge, the price of gasoline was $0.12 in 1913. Another reference cites $0.25 in 1918, but I will go with the lower and older one as it is less favorable from the perspective of my deflationary position."

I don't have a source for this but I believe there was a good deal of inflation that, purely by coincidence, began almost immediately after the Federal Reserve was created in 1913. Around that time decent cigars could be had for 5 cents a piece, and by the end of the war, good cigars went for at least 10 cents a piece. One of the Republican campaign slogans of the era was: "What the country needs is a good 5 cent cigar."

That seems to align fairly closely with the doubling in gasoline prices over the period that you indicated. Then, for gasoline prices to have remained essentially flat over the next 40 years despite the inflation which had certainly occurred, it must have been the case that petroleum production grew even faster than demand did.

Anonymous Anonymous February 23, 2013 6:04 PM  

Both of which depend on distribution systems that are targets and potential failure points in an emergency.

The natural gas supply stayed up in NYC during hurricane Sandy, even in the Rockaways, until damaged buildings forced it to be shut off.  All the NG pickups sold by GM and Chrysler are dual-fuel.  A plug-in hybrid can always fall back to liquid fuel.

Perhaps you should get a bolt-on wood gasifier.

Not while the car is in warranty.  A wood-gasifier powered generator is more likely; to the car, electrons are electrons.

Or a modest solar array.

That is also on the to-do list.  Electrons are electrons.

That is the amount of money being sucked out of the economy by the higher prices for energy

The better your mileage, the less money you are responsible for sending out of the US economy.  If you can't get to zero, less is always better.

Anonymous Koanic February 23, 2013 6:04 PM  

I think what the graph fails to reflect is that the American consumer is significantly poorer in 2013 than in 2008, so the relative costliness of gas is higher even if the price is not.

It is possible for economic inequality to rise without affecting inflation or deflation, yes?

Also, after reading the CPI definition I have a hard time imagining it is useful for comparisons across time. It really seems only suited for contemporaneous class distinctions. Obviously prices and the average "basket of goods" are going to adjust in response to economic change, but since both can change, only knowing the price change is not useful.

Anonymous Rufus February 23, 2013 6:33 PM  

Here in NZ, the price of gas is 50-60% TAX. Basterds. They know we can't do without the stuff, lacking any decent alternative. And it's going up again, 3c/l per year, for the next 3 years. Absolute basterds.

Anonymous Koanic February 23, 2013 6:45 PM  

In conclusion, I reckon gold denominated GDP is probably the best economic measure.

Blogger MarkyMark February 23, 2013 7:20 PM  

Obama and his environmental whacko cronies are doing EVERYTHING they can to restrict supply of oil & natural gas. Obama vetoed the Keystone XL Pipeline, which would have brought one million barrels of oil a day here! He's also stopped drilling on federal lands. He has that cap & trade thingie. When supply of anything goes down while demand remains the same or increases, prices must increase-duh.

Anonymous Josh February 23, 2013 7:38 PM  

In conclusion, I reckon gold denominated GDP is probably the best economic measure.

Why?

Anonymous Noah B. February 23, 2013 8:30 PM  

Cost of US wars in Iraq and Afghanistan: $70 million, 0.6 US soldiers, and 3 civilians per insurgent killed.

Anonymous The other skeptic February 23, 2013 9:41 PM  

OT: More crap about how hard done by AfAms are

Blogger shazbot February 23, 2013 10:13 PM  

You are missing some critical info here. At its all time high in july of 2008, crude oil was trading at $147.27 a barrel. Oil is now trading around $93 a barrel, yet gasoline is still near the highs it reaced in 2008. So the major raw material of gasoline is off its all time high by some 37%, but gasoline is selling for nearly the same price as when oil was almost 60% higher in price. I have seen nothing in the media that is bringing attention to this fact, nor have i been able to find a viable explanation for this massive discrepancy.

Anonymous Geoff February 23, 2013 10:33 PM  

@Vox,

You sure you wouldn't rather use a more inelastic item like, say, food? Cuz demand for oil has sure gone to shit with the worldwide decline in production. And by food I mean actual organic food, not that crap made of corn sugar sold at Wal-Mart.

Oil demand can go up and down, but people gotta eat, man. Show me where prices are falling in a Whole Foods, and I'll consider that Nate's a moron and Vox is maybe as smart as he considers himself to be.

Anonymous Anonymous February 23, 2013 10:46 PM  

Something (Blogger, Firefox, faerie dust) won't let me bookmark comments correctly any more.  That makes it too hard to track this discussion and respond to posters properly.

Sorry, folks, but I can't offer facts about oil, energy, and everything else in a coherent way any more.  Leaving this thread.

Anonymous David of One February 23, 2013 11:14 PM  

Vox,

Is this indicative that the pain is more pronounced and will likely spread?

http://www.telegraph.co.uk/finance/economics/9889410/Britains-credit-rating-downgraded-from-AAA-to-Aa1.html

Anonymous Koanic February 24, 2013 12:55 AM  

"Why?"

Check it out. Only problem is the price of gold is manipulated too, but it's still a hell of a lot more accurate than anything else for showing bubbles and busts.

Gold v stock market would also be interesting.

http://pricedingold.com/us-gdp/

Ideally, there would be something to show gross national wealth and leverage ratio, denominated in gold, over time. Put that together with GDP or preferably GNP and you'd have a basic national balance sheet.

Anonymous sprach von Teufelshunden February 24, 2013 3:14 AM  

Many here speak of the outstanding national debt of some 16 trillion. What if 10 trillion of that is not genuine? I mean, completely fabricated. Not subject to real inflation. In other words, not a product of real inflation.

A six trillion dollar national debt is still nothing to sneeze at. However, it is far more manageable than more than almost three times that amount. I would like people here to view the following. Pay attention to the national debt clock. Understand this was produced and presented in 1992. (over 20 years ago)

A Foreclosure of a Dream

This is merely to setup the context and pretext for the following. It is also simply good music, with a very pertinent message, very relevant to today. Next, listen to the following four 25 minute segments. The part about the 16 trillion debt is in part 2. However the entire discussion is economic, and inflation (real and false) is discussed heavily.

Fetzer, Webb, and Duff

Part 1
Part 2
Part 3
Part 4

The real inside bonus, is that we have three Vietnam Marine veterans in this conversation. One of which is a sniper, and is actually assembling a AR-15 during their conversation. Where else is one going encounter that?

Anonymous ericcs February 24, 2013 7:25 AM  

Ok fine, so we don't really have inflation, which means the great unwashed masses of citizens will never notice that anything is amiss, which means that nothing is going to change.

I think the left is right, we can all sit around and type and vent and predict to our hearts' content, but ultimately this is just a meaningless noise that signifies nothing.

What's needed is organized civil disobedience, nullification, and ultimately secession. What is needed is setting up a parallel government with parallel institutions based on traditional society and original Constitutionalism, probably including a new Christian sect of "onward Christian soldiers" so that we can argue against the current State in its leftist courts on the same basis as Muslims who claim they are simply following Sharia.

Otherwise, we're already so far gone that what's the point? BTW, I'm going to be driveby, my apologies, but this is all too depressing to really continue.

Anonymous PorkyIII February 24, 2013 8:02 AM  

Inflation? Look at bacon prices!

Blogger shazbot February 24, 2013 10:00 AM  

If the powers that be would simply allow technology to impact fuel economy as it has every other aspect of technology and society, there would be an economic rennaissance. A double or tripling of the amount of miles you could drive would make demand for oil crater and drive the costs of everything you buy (including food) dramatically lower.

The challange of course is that those pulling the strings dont want to see a loss of revenue, nor does the government. They want slaves dependent on an inefficient century old internal compution engine that hasnt been improved upon in efficiency in probably 50 years. It is amazing to me that no one discusses how this one improvement in this one area can completely transform the economy.

Anonymous Cobre February 24, 2013 9:16 PM  

You are missing some critical info here. At its all time high in july of 2008, crude oil was trading at $147.27 a barrel. Oil is now trading around $93 a barrel, yet gasoline is still near the highs it reaced in 2008. So the major raw material of gasoline is off its all time high by some 37%, but gasoline is selling for nearly the same price as when oil was almost 60% higher in price. I have seen nothing in the media that is bringing attention to this fact, nor have i been able to find a viable explanation for this massive discrepancy.

Actually, this was explained by more than one commenter so far.

1) REFINERY CAPACITY
The 2012 numbers show significant monthly declines when compared against 2008. Note two things about this data set - there's seasonality to consider, which means we look at the data from a YoY perspective; September 2008 was the lone outlier, exceptional due to force majeure at refineries caused by Hurricanes Gustav and Ike. Simply put, some capacity has been shuttered in the northeast and there was a fire this summer on the west coast, as well as major interruptions from the Sandy storm surge.
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=mocggus2&f=m

2) U.S. SPOT PRICE vs. WORLD
This is a critical fundamental piece - the U.S. NYMEX price is based off a WTI barrel for delivery at Cushing, OK. There is somewhat stranded supply there meaning that it's closer to the center of the country and far enough away from refineries to require significant transportation costs. This is why people are talking about the Keystone XL pipeline so much. It would make it easier to move supply to the Gulf where much of the refinery capacity is.

Also, the shale oil production you've likely heard about has been booming along the Bakken Shale which is also somewhat distant from refineries. So our inland supply is up while the rest of the world has been exceptionally concerned with the Middle East going back to the Libyan conflict, along with some currency issues and North Sea supply issues. That has raised prices elsewhere. This is VERY important in the refinery equation because much of the supply coming into those refineries is priced at the GLOBAL price for seaborne cargoes. The assessment of this price differential is called the Argus LLS vs. WTI swap looking at the prices of a barrel unloaded off a tanker near Louisiana refineries versus that inland delivery point at Cushing (WTI) where supply has been somewhat stranded.

http://www.cmegroup.com/trading/energy/crude-oil/argus-lls-vs-wti-argus-trade-month-swap-futures_quotes_globex.html

The spread is over $20 now. This is a large piece of why the price of a gallon of gasoline divided by a barrel of WTI crude is higher than in 2008. Essentially our Gulf refineries aren't paying $95 for crude, but $115.

For a long-term view I created this chart over at Barchart.com. It's the spread of a Brent barrel (the UK price which is probably the most used proxy for global cargo prices here in the U.S. and is usually within a buck of the LLS price) and WTI/NYMEX domestic price. For convenience the December 2013 contract is used (DEC is typically the most liquid month for long-dated futures) and shows a five-year view. This is quick and dirty, but it's a good way to see the change in the spread from a free data source over time. Note that in February 2008 the spread was essentially level. The spread has widened dramatically over the last two years.

http://www.barchart.com/chart.php?ss=1&spread=CBZ13-CLZ13&p=WN&d=X&sd=02%2F24%2F2008&ed=&size=M&log=0&t=LINE&g=1&sh=100&indicators=&addindicator=#jump

Blogger shazbot February 25, 2013 12:02 AM  

Your analysis is appreciated and offers a response i havent seen before, however it still doesnt account for a discrepancy of $30+ per barrel of crude. How can gasoline prices now be HIGHER than what they were when oil was $147.27 a barrel?

Anonymous Cobre February 25, 2013 2:26 AM  

Happy to help explain. Now for some clarification on price. The current "record" prices for gasoline aren't really all-time highs. They are the highest prices for February. The MSM is beating that headline, and while it's correct, it's somewhat misleading.

Typically "driving season" last from around Memorial Day to Labor Day and sees the peak prices for gasoline during the year. Of course, there can be all sorts of supply/demand issues at other times of the year that interfere. So let's look at actual retail gasoline prices here:

- EIA DATA
http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=EMM_EPMR_PTE_NUS_DPG&f=W

One can go back and see that in July 2008 there were a couple of weeks of $4.11 gasoline. Last week it was about $3.75 for regular. Hence the media squawking about "the highest prices ever" being misleading.

- TREND
It's not the best approach to take the all-time high print for WTI crude and compare it. That was an intraday peak at $147.27 on 7/11/08. The actual close for the contract that session was $144.60. Not a huge difference, but if we look at a simple moving average of 20 days (or four weeks of trading) we'll see a more useful piece of data to inform where gasoline prices "should" be based on the persistence of higher prices.

On that day in July the 20-day moving average was $128.97. It had been as high as $139.04 on 6/19/08. So it had trimmed by roughly $10 in those three weeks and change. A month later the moving average was closer to $115 at par with the futures settle.

Using that 20-day of $128.97 against a $4.11 gallon, we get a multiplier of about 31.4 for the peak of July 2008.

Right now WTI trades about $93... but the 20-day moving average on the April 2013 contract is $96.60 -- a more useful number because price trend persisted above $95 for five or six weeks. Now we need to consider the $20 or so of premium to the tanker price in Louisiana as discussed in the prior comment. For that we'll just use the 20-day moving average of Brent crude which is at $115.92. Divided by $3.75 we see a multiplier of about 30.9.

31.4x versus 30.9x. Basically it's inline against the peak.

- PROBLEMS
This methodology is just a back of the envelope approach, and it's not necessarily a typical relationship that an analyst would track. Just a ballparking approach. One flaw is that we shouldn't really compare February prices to July prices because of seasonal demand. I would not be surprised if Brent/gasoline was 28-30x instead of 30-32x because of demand and refinery capacity... meaning prices over $4 presuming oil stayed exactly where it is now. Again, this is a really rough assessment. There are still refinery constraints that will be supportive of price later in the driving season. It's only February. Typical seasonality should give a nice tailwind to price should we have any kind of normal supply/demand balance heading toward Memorial Day.

Refineries and linearity: I get the impression that many readers here might be expecting some sort of linear relationship between supply and demand. Yet there's too many real life examples that should illuminate why linearity doesn't carry into the oil/gasoline piece. The futures price is truly the price of the last barrel. Any time there's a kind of land grab or market corner or duress, people get temporarily irrational and start paying bubble prices. It usually doesn't last in commodities futures as fast money gets out and demand weakens.

However, as a counterpoint, in the U.S. demand gets really elastic at the psychological price point of $4 per gallon. If we hit the driving season with prices north of $4, we're likely to see fewer miles driven almost immediately. It happens like clockwork.


Blogger papabear February 25, 2013 3:01 AM  

"This simply fact convinced me on September 12th that the terrorists were not at all serious about inflicting damage on the United States. Twenty suicide terrorists would have done much more damage had they attacked the refineries around the country instead of the intended targets of 9-11 and the effect would have been much more profound than any attack on NYC. Refineries are like paint factories, they burn well."

Yeah, idjits. Or maybe it was an inside job after all?

Anonymous Anonymous February 25, 2013 8:33 AM  

Typically "driving season" last from around Memorial Day to Labor Day and sees the peak prices for gasoline during the year. Of course, there can be all sorts of supply/demand issues at other times of the year that interfere.

There is also the summer vs. winter gasoline blend issue.  Winter formulations in colder regions are allowed to have a lot of low-boiling fractions like butane, which both aid in cold starting and are cheap.  Summer and warm-climate blends can't have that, or you'd have crazy smog problems from the evaporation.  The result is that the "driving season" blends have a restricted supply of blending components compared to winter blends, and supply and demand says the price goes up.

Blogger shazbot February 25, 2013 12:00 PM  

Cobre, excellent explanation, and it does come much closer to explaining the discrepancy than I have ever read. Kudos to you for that. Perhaps you would like to tackle the other point I made, which was...

"If the powers that be would simply allow technology to impact fuel economy as it has every other aspect of technology and society, there would be an economic renaissance. A double or tripling of the amount of miles you could drive would make demand (and price) for oil crater and drive the costs of everything you buy (including food) dramatically lower.

The challange of course is that those pulling the strings dont want to see a loss of revenue, nor does the government. They want slaves dependent on an inefficient century old internal combustion engine that hasnt been improved upon in efficiency in probably 50 years. It is amazing to me that no one discusses how this one improvement in this one area can completely transform the economy."

There are cars from the 1980's that got better fuel economy than anything built today. One example being the 1984 Honda Civic Coupe 4 cylinder that got 48city/64hwy MPG on regular gasoline with no hybrid technology.

However if you compare the technology in a computer or cell phone from the mid 1980's to today, you have a technology that is so advanced, it would seem to be impossible, even otherworldly at the time.
How can this discrepancy be explained without this dearth of advancement being deliberate?

Anonymous Anonymous February 25, 2013 12:32 PM  

There are cars from the 1980's that got better fuel economy than anything built today. One example being the 1984 Honda Civic Coupe 4 cylinder that got 48city/64hwy MPG on regular gasoline with no hybrid technology.

People drove smaller cars then.  The original Volkswagen Rabbit had an empty weight less than 2000 pounds; the curb weight of the 2013 Golf hatchback is 2939 pounds, half a ton heavier.  Also, the Honda CVCC engine was stratified-charge and couldn't meet today's NOx standards.  Today you CAN get a Prius that gets 45-50 MPG highway in a far bigger car, and meets emissions.  The question that should be on everyone's mind is, why do so many people insist that they MUST drive a 15 MPG truck?

The challange of course is that those pulling the strings dont want to see a loss of revenue, nor does the government. They want slaves dependent on an inefficient century old internal combustion engine that hasnt been improved upon in efficiency in probably 50 years.

This doesn't explain why the best-selling vehicle in the USA is usually a truck, and hybrids are just 3% of the market.  Americans need to take responsibility for what they buy and how they use it.  If anyone is pulling THEIR strings, they need to refuse to let them be pulled.

Blogger shazbot February 25, 2013 3:04 PM  

Again, compare the technological development of a cell phone in 1984 to a new iPhone or droid. Then compare that to the auto industry to see if there has been commensurate development in fuel economy. There is an astounding difference.

The trucks aren't more efficient today than they used to be either. A 1984 Ford F150 got 16/22 MPG out of a 4.9L 6 cyl. Compare that to a 2012 Ford F150 3.7 L, 6 cyl which gets 17/23 MPG out of a smaller engine. Even if you account for weight and other factors, how can you defend 30 years of no significant technological development?

How can a sub-$10K Civic from 1984 with 64 hwy mpg completely crush a $30K Hybrid technology 2013 Prius at 50 MPG nearly 30 years later? The evidence appears to be that the technology exists to make cars MUCH more efficient, which would solve all of our energy problems and most of our economic ones. But for some reason, that technology is being denied from the public. There is simply too much oil profit and tax revenue at stake.

Anonymous Cobre February 25, 2013 7:45 PM  

Shazbot, you're comparing disparate markets between cell phones and cars. Also, it appears that some of your data points are off.

From wiki on second gen Civic:
"Also introduced was a new highly fuel efficient I4 model, the five-speed "FE" (Fuel Economy) which was rated at 41 mpg-US (5.7 L/100 km; 49 mpg-imp) in the city and 55 mpg-US (4.3 L/100 km; 66 mpg-imp) on the highway.[1] However, even the standard 1500 cc model achieves 34 mpg-US (6.9 L/100 km; 41 mpg-imp) city, and 47 mpg-US (5.0 L/100 km; 56 mpg-imp) highway when driven 55 mph (89 km/h), the maximum U.S. speed limit at the time (California mileage ratings)."

So much in that to discuss... the standard edition was a 34/47 mpg and the FE version was 41/55 mpg -- neither close to 64 mpg highway. At the time the EPA was using 55 mph has highway speed and GENEROUS methodology which they've changed many times. I doubt that if the same methods applied to the 1980 Civic it would generate such a high mileage turn given that the most recent testing is more realistic. A good article on this is here: For a good story on mileage ratings, see: http://www.caranddriver.com/features/the-truth-about-epa-city-highway-mpg-estimates

Don't know about those prices either. The MSRP for a Prius C (the smaller version, which is still a larger car than the 1980 Civic and is a more fair comparison at 2,500 lbs to the 1,800 lbs of the Civic) is not $30k, but $19,080. Adjusted for inflation, that's $6,955 in 1980 dollars. I don't know what a Civic cost back then, but I wouldn't be surprised if it was something close to that $6,955 price meaning the cars cost about the same in 1980-chained dollars. Technology has advanced dramatically between the two cars for about the same price. That Honda didn't come with crumple zones, integrated bluetooth and the ability to cruise at 70 mph at 66.5 db (per Edmunds.com).

You seem to have an economic assumption that mileage is what drives consumer demand. If mileage were the only milestone I'm sure we could have a 100 mpg car today. No problem. It would be slow as the 1980 Civic, lack the safety/comfort/emissions and no one would enjoy driving it much, but it would be very fuel efficient. OR Toyota could make a carbon fiber tub and body paneling and get the same Prius down from 2,500 lbs to maybe 1,400 lbs and get 100 mpg while keeping the safety/comfort/performance of the 99 hp engine. In fact, it would probably seem quite peppy with a power to weight ratio like that. Only problem is that it would cost $100k. It's hard to scale structural composites production because you need elaborate controls for resin flow/cure times/etc. My point is that no one is holding back secret technology. Demand is largely what drives what gets built with safety and emissions regulations having some input along with CAFE standards. People want certain things in their cars at certain price points.




Blogger shazbot February 25, 2013 11:46 PM  

My dear fellow, i certainly appreciate your arguments, but i must vehemently disagree with them. The 64 hwy mpg for the 1984 civic was one version of that vehicle, but appears to be a very valid number. If you read some forums, you will see that owners of these old civics were able to achieve these numbers or close to them.

Computers and cell phones are not as disparate as you suggest. In fact they should parallel. The computer processors that run our laptops and cell phones also are the brains of our modern vehicles, particularly the fuel injecting systems that did not exist (at least widely) in 1984. With the massive increase in computing power, a modern vehicle should be able to use just enough fuel to run a vehicle without wasting it, and certainly do better than a "dumb" computerless 1984 civic carbourator.

And it should ABSOLUTELY be able to improve upon a larger 1984 ford F150 engine compared to the smaller 2012 version since we are comparing the same truck 28 year later.

As far as demand, who WOULDNT want a 100mpg vehicle as long as it was balanced by other things that you wanted? Certainly that would rate higher on the list than expensive and useless technology like automatic parallel parking and adaptive cruise control for people too lazy to manually modify their speed.

I am quite sure the average american would prefer to spend less than 8.4% of their annual HOUSEHOLD income on something other than gasoline. Thats not mentioning every business in America as well. The government and the oil companies would prefer status quo.

100 MPG should be a matter of national security and a top goal for the government and private industry to achieve. As i said before, it would create a renaisance for the economy and drastically reduce the cost of virtually everything we buy (except oil). There are very few things that would have as great an economic impact.

Anonymous Cobre February 26, 2013 12:15 AM  

My dear fellow, i certainly appreciate your arguments, but i must vehemently disagree with them. The 64 hwy mpg for the 1984 civic was one version of that vehicle, but appears to be a very valid number. If you read some forums, you will see that owners of these old civics were able to achieve these numbers or close to them.

The EPA numbers aim at typical driving. You're cherrypicking an exception to rationalize your argument. Are you aware that hypermilers have driven a Prius on a nearly 1,400-mile trip getting over 100 mpg? Google "Wayne Gerdes." Now does this guy's driving style give me license to comment that the Prius gets a "valid" 100 mpg? No. So while I don't doubt that people can squeeze greater economy than the posted EPA data, you completely missed the point.

As far as demand, who WOULDNT want a 100mpg vehicle as long as it was balanced by other things that you wanted? Certainly that would rate higher on the list than expensive and useless technology like automatic parallel parking and adaptive cruise control for people too lazy to manually modify their speed.

I don't know what to tell you other than to look at the demand for small cars in the U.S. January 2013 data shows that light trucks and SUV/Crossovers moved over 827k units. How many small cars were sold? 204k. The F150 you keep bringing up, with its terrible mileage, outsold the Prius 3-to-1. (see http://online.wsj.com/mdc/public/page/2_3022-autosales.html)

Can't make this any simpler: People are voting with their wallets. And the public shows a greater preference for size and comfort in their vehicles than for gas mileage.

Of course people want better fuel mileage... and they want to eat carbs and not get fat too. It's not news; this country values comfort more than change. Nice chatting with you, I'm moving on to other topics.


Blogger shazbot February 26, 2013 9:09 AM  

You as well. We'll just agree to disagree on this one. Thanks for your thoughts.

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