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Monday, June 13, 2011

It's Really About Energy Prices And The Fed Is Delusional

No matter how you slice it and dice, that's where we are. And energy prices are not correcting, so the slump is doomed to continue.

It's not about supply:

It's about lots of money chasing something that has value,
but the end result is

consumers and businesses with little money to spend. That's through the first week of June.

There's a lot of buying of petroleum product right now, as opposed to simply futures.

Traders think that they have margin because they are still off the peak quoted prices of 2008, but they don't, because in 2008 quoted spot and future prices were offset somewhat by longer contracts with lower prices, so this year the actual cost of oil to refineries has risen much more quickly. The following graph only goes through April:

In April of 2011, refinery cost was $109.72 versus the April, 2008 cost of $106.09. See data.

The average petroleum product energy import price in April of 2008 was $96.81.
The average petroleum product energy import price in April of 2011 was $103.18. There is some offset this year due to higher internal production, but not much, so street prices weren't going to come down much, which is how we got to those June price levels you see in the first graph.

So all these people who should know better who are claiming that the effect on the economy of energy prices will wane in the second half are screamingly psychotic (in economic terms), because the real effect is JUST HITTING THE STREET.

This is how it works. After a few months with significantly higher gas and diesel prices (higher product pricing), consumers start to get really strapped. The first six weeks or so most of them just pull back on weekly spending, but eventually, everyone but Sheryl Crow discovers that this week, they do need to stock back up on TP, paper towels, and tinfoil. So that wears out. Then they juggle the bills a little. Two-three months, and they are in deep, and they aren't even walking in a lot of retail stores any more.

Between 2-3 months it shows in retail, so retail starts to push hard (coupons, mailed rebate certificates, that sort of thing). But it doesn't work, so staffing and hours get cut a bit after another couple of months. Once the pattern is set for a few months, they adapt to it. That is why by May retail employment started to turn down.

Between 2-6 months it starts showing up in public service businesses. Lawyers, doctors, insurance agents, etc. They start pulling back hard, and they don't make a lot of expenditures that they normally would (on average). All of a sudden all these businesses are cutting back.

So now all of a sudden the auto dealerships start hurting. Now once it has diffused to that point, things are going to get rocky fast. The angst of the the lower 60 percent has suddenly diffused into the 60-75% income bracket, and they spend so much relatively that it suddenly shows hard in retail, and they also often have businesses, and they hire and give raises. Well, this summer, they aren't going to be doing any of that.

I'd say we have lost our last chance at avoiding a downturn, because I've been calling these types of businesses over the last two weeks, and they are all seeing a big fall off in revenue. We'll see what NFIB says tomorrow; I have a hunch that it won't be very good.


Comments:
It was plain to see that devaluing the dollar to
spur exports would crush domestic demand as
energy costs spread through the costs of goods.
The only way to pay down the deficit, reduce the
trade imbalance, and to support asset prices was
to completely revamp our tax and trade policies.
We cannot continue to burden our working class
with high taxes while allowing foreign manufactured
goods to have free access to our market. This is not
1980 and those who think we can cut tax revenue
and spend like there is no tomorrow, are crazy.
We have to cast a wider tax net onto those that
wish to export to us. If they want their US investments
to be paid, they will go along.
Sporkfed
 
Well the (supposedly) smarter half of the Soviet's Senatorial twins is all over the local news media today threatening vile punishments against oil 'speculators.' One is tempted to send her office pictures of Speculator #1 (Helicopter Ben) and Speculator #2 (herself as representative of the US political class), but she probably wouldn't understand.
 
There is no intelligence in the political class of WA state. That's been clear for awhile now.
 
Soviet of Washington,

Poor Maria Cantwell, she just can't get well. At least not by accusing oil speculators. How about doing something about the NLRB's takeover of Boeing. That might give her some political props. But then that would be going against dear leader's wishes. As the song goes, "What do you do about a girl named Maria?"

My suggestion: Vote her out of office.
 
With apologies to all syllable-counters (I've only got a few minutes):

There was a Senator from Wa.
who constantly flapped her jaw.
The voters' resolve
was insufficient to solve
a Senatorial problem like Maria.
 
We would love to be able to vote her out! The problem is the western half of the state. The eastern half would have fixed this a long time ago.

WA state passed this nifty law where the top two candidates in the primary face off in the election, regardless of party. That way, we can have Dems vs. Dems. I can't remember exactly how they convinced everyone this was a good idea.
 
Jimmy - I think the disconnect of many long-term politicians is being brought to our attention by the genuinely difficult economy.

It's increasingly hard to believe that they can generate solutions when they do not seem to perceive the problem.
 
Teri; "I can't remember exactly how they convinced everyone this was a good idea."

Wasn't it sold as being more FAIR? Or it would provide more (liberal) candidates. I can't remember exactly how it was packaged. Just knew I was against it.


How about an inituiative to change it. What's Tim Eyeman up to this year?
 
Snarky poetry aside, I should thank you M_O_M, for that detailed explanation of how a reduction in discretionary spending "trickles up" through the economy, with time frames and data points to watch for. We need a WikiMOM or something for these nuggets...
 
The hardest thing for a person to do is change his mind. And long-term politicians have had their egos stroked for so long that changing their minds becomes impossible - their entire sense of personal self-worth is based on closed-mindedness.

One of the few politicians I respected was Paul Simon - when he decided to leave public life he meant it. But most politicians are like Newt Gingrich - the public is through with them but they won't go away.

(Another reason why I would never vote for a Presidential candidate under the age of 60. When they're finally out of office, nature will take them out of public life soon enough. Imagine the near future where both Bill Clinton and Barack Obama are running around loose in the public eye. YUCK!)
 
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