Free Markets, Free People

Daily Archives: February 22, 2012


Energy prices are rising, but energy demand is declining.

We’ve been seeing some better—if not good—economic numbers lately, mainly in employment, but also in industrial production, and general business conditions. One might be tempted to believe there’s at least a mild recovery on the way. That’d be nice.

But I’m…troubled. First, there’s this:

Oil prices aren’t high right now. In fact, they are unusually low. Gasoline prices would have to rise by another $0.65 to $0.75 per gallon from where they are now just to be “normal”. And, because gasoline prices are low right now, it is very likely that they are going to go up more—perhaps a lot more…

In terms of judging whether the price of WTI is high or low, here is the price that truly matters: 0.0602 ounces of gold per barrel (which can be written as Au0.0602/bbl). What this number means is that, right now, a barrel of WTI has the same market value as 0.0602 ounces of gold.

During the 493 months since January 1, 1971, the price of WTI has averaged Au0.0732/bbl…

At this point, we can be certain that, unless gold prices come down, gasoline prices are going to go up—by a lot.

In other words, there’s at least an 18% price differential in the current price of oil compared to gold, compared to the historical average.

Another important thing to remember is that the current rise in energy prices does NOT appear to be related to demand for energy. According to the US Energy Information Agency, the US demand for both electricity and petroleum has been decreasing.

Statistics for energy use usually run a couple of months behind, but the recent figures for petroleum are that from August, 2011 until November 11, Total Crude Oil and Petroleum Products consumed, in thousands of barrels per month, fell from 593,757 to 562,019. Figures for the same months in 2010 are 609,517 and 569,312, respectively.

Similarly, the most recent electrical generation numbers, in millions of kilowatt hours, show that from August to November, 2011, total electricity consumption fell from 370,073 to 273,053. Both figures are about 2 million kWh less than the same months in 2010.

Now, maybe in the last two months there’s been a huge turnaround in energy consumption, but please note that the year-on-year demand is declining, and in general, has been since 2006.

So, if energy use is declining, while prices are increasing, and supply remains steady—or is increasing—then we can reasonably look to monetary reasons for the price increase, as the economic fundamentals do not explain the price changes.

The implications for energy prices, therefore, are not good. Start saving those pennies, kids.

For all the good it’ll do you.

Oh, and by the way, if the economy is recovering, why is energy demand decreasing, rather than increasing? Just asking.

~
Dale Franks
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Had Christy Romer gotten her way, the stimulus could have been much worse

When Larry Summers and team were preparing a memo for Barack Obama on the planned stimulus, Christina Romer was a part of the effort.  The New Republic brings to light a conflict within that team about how much stimulus they should recommend.  As you recall, the final recommendation included two options.  Option one was a “modest” stimulus in the rage of $550 to $670 of legislated money (about the same amount that Paul Krugman first recommended).  The second option was for $850 billion and was the option Obama chose.

Summers mentions in the memo that in order to make a bigger impact on the “output gap”, a stimulus of over a trillion dollars was needed but most likely “not accomplish the goal” of reducing the “output gap” because of the “impact it would have on markets”.

Romer, on the other hand, felt that closing the “output gap” was much more important than the impact such a move might have on markets and recommended a much higher stimulus.  How much higher?  Approximately twice the level of the highest option presented to Obama of $850 billion.  That’s right, about $1.7 trillion dollars.  Romer claimed that doing so would bring the unemployment rate to “5.1%”.  But then, as we remember, the country was promised that if the stimulus that was eventually passed was made law, unemployment would remain under 8%.  

Of course it didn’t rising to 10.5%.  However the prediction came directly from the memo Summers presented to the president – $880 billion stimulus would create 3.4 million jobs and keep the unemployment rate at 7.3%..  Neither of those came true and the administration was reduced to claiming “saved” jobs in its defense.

Romer’s predictions were even rosier.  She believed that a $900 billion stimulus would create 3.75 million jobs and put the unemployment rate at 6.6%.  Again, not even close.

Yet, when you read the comments of others out there, you find some of them still implying that a larger stimulus would have been better for what ailed us.  That our problem was the size of the stimulus, not its design.

Of course that’s patent nonsense.  The stimulus failed because it was horribly designed and terribly executed.  And it was aimed at the wrong things.   It became a combination of slush fund for politicians and budget short-fall device for states.  Where what little was aimed at it supposed purpose (creating jobs) it failed.  We discovered that “shovel ready” was anything but.  Additionally it was used to bail out industries government had no business bailing out.

Whether it was $900 billion or $1.7 trillion, those facts wouldn’t have changed one bit.  About all that might have happened had Romer gotten her way is a few states might have been able to delay their financial reckoning for another year or so.

Noam Scheiber, the author of the TNR article (and an upcoming book on how the Obama White House “fumbled” the recovery) doesn’t go as far as to claim the larger stimulus would have been a better choice although he certainly implies it.  He argues that Obama wouldn’t have proposed it because Congress – even a totally Democratic Congress – wouldn’t have passed a $1.8 trillion dollar stimulus.

However, he argues, the inclusion of the higher stimulus number would have gotten Obama to “have felt a greater sense of urgency had he better understood how far he was from the ideal.”

First, I don’t agree that a Nancy Peolosi/Harry Reid controlled Congress wouldn’t have done exactly that, i.e. passed an almost $2 trillion dollar stimulus package.  One only has to remember how they steamrolled the health care bill through to doubt such a thing couldn’t have happened with a larger stimulus.  Secondly, it is highly debatable that Romer’s number was any sort of an “ideal”.

It was, at most, a “best guess” and given her predictions of the effect of a $900 billion stimulus (the size eventually passed) on job creation and unemployment, it is a suspect “best guess”.

And finally, regardless of the numbers proposed, it was a terribly designed and executed program that redefined “waste, fraud and abuse”.  Doubling that wouldn’t have made it better.

Unlike some out there lamenting Summers refusal to have included Romer’s recommendation, I applaud it.  That doesn’t mean I agree with the number he came up with, but to use Washington DC budgetspeak, he “saved” us about a trillion dollars.

~McQ

Twitter: @McQandO


Economic Statistics for 22 Feb 12

 

The following statistics were released today on the state of the US Economy:

ICSC-Goldman reports store sales were driven up 3% last week by Valentines Day. Sales are 3.2% higher than last year. Predictions for the whole month however, are still below trend. Redbook’s same-store sales rate, at only a 2.9% year-over-year increase last week, continues to hold almost at the lows for the year. Conversely, Redbook is signaling a strong 1.4% gain for the month, in opposition to the ICSC-Goldman forecast.

Existing home sales rose 4.3% in January to a 4.57 million annual rate. But the median price still fell sharply, down -4.6% to $154,700.

The Mortgage Bakers Association reports mortgage applications fell -4.5%, with purchase apps down -2.9%, and refinance apps down -4.8%.

~
Dale Franks
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There are polls and then there are polls

As I’ve said repeatedly over the years, candidate vs. candidate polls are virtually useless this far out from an election (9 months).

There’s little reason to pay attention to them.  So when you see these:

Obama 49.0%
Romney 43.3%

Obama 50.0%
Santorum 42.5%

Obama 53.0%
Gingrich 39.1%

Obama 48.6 %
Paul 40.4%

Remember this:

[I]n January 1980, the Gallup Poll showed:

Carter 63%
Reagan 32%

And, of course, there are plenty of other examples of those sorts of polls to be found if you look.

That said, there are polls that are indicators because they provide a history that lends itself to identifying whether or not an incumbent is actually in trouble or not.  The candidate v. candidate polls above really don’t.  We’re still in the early stages of nominating a candidate for one party and the focus has yet to really turn on the incumbent.  Numbers will change, I suspect fairly dramatically, when that happens.  And, to this point, I’d suggest that most of the country isn’t yet engaged in the presidential race.  That will happen 6 months from now when you can begin to pay attention to those polls pitting candidate against candidate.

But to those polls that matter, or at least point to historical trends, etc.  Here’s one:

It’s February, nine months before a presidential election, and only 22 percent of Americans say they are satisfied with the way things are going.  Voters haven’t been this unhappy with the country since George H.W. Bush’s presidency, when only 21 percent of Americans reported being happy with the country’s direction. And before that, the lowest approval rating was 19 percent during Jimmy Carter’s first term.

What do the two presidencies have in common? Neither of them won re-election. And, if the trends holds true, Obama looks to be in an equally precarious situation.

The American Enterprise Institute for Public Policy Research released its 2012 campaign outlook, and it’s clear Obama’s sitting in the same position George H.W. Bush and Jimmy Carter were in during the February before their election losses—voters don’t feel good about the country.

So when I hear Democratic strategists like James Carville saying things like this …

The only way the president will lose according to Carville is if some event takes place and changes things.  He maintained it wouldn’t be the result of the GOP nominee outshining Obama.

“Right now, things are starting to perk up a little bit,” he said. “Who knows? This is the — no Republican can beat Obama. Events can beat Obama. He’s not going to get beat by a Republican. Now events could come in and cause him to lose the election. But that’s it right now. That was not the case three months ago.”

… I laugh.  This is pure “whistling past the graveyard” and political spin.  Carville is engaged in psychological warfare here.  He wants everyone to believe the worm has turned and it is all sunlight and roses for his candidate.

If dissatisfaction can be called an “event”, then that’s the event which should put Obama exactly where he belongs in November  – planning for his presidential library in 2013.

Carville knows as well as anyone that at this point in the process, his choice for re-election has gone almost unscathed and his record mostly unscrutinized.   But that will change and it will change dramatically in a few months.  And about that time, the focus of the nation will begin to turn to national politics. 

The fact remains that the American public is not happy and when it is not happy it tends to not reelect its president.  That is the “event” this president faces.   And my guess is, when the GOP finally settles on its candidate, OMG (Obama Must Go) will be the driving “event” which determines the election.

Carville says “no Republican” can beat Obama?  I disagree.  In the end, any Republican can beat Obama.  Some by larger margins than others, certainly.  But that’s my prediction.  The Democrats really haven’t a clue about the level of dissatisfaction that exists with this president.

Even the president most demonized by the left had better numbers than Obama does.  At the January SOTU prior to his 2004 re-election run, George W. Bush enjoyed a 41% satisfaction rate (as did Ronald Regan and Bill Clinton).  As noted, Obama is at 22%, 3 points above the president almost universally identified as our worst modern president.

Let’s see if James Carville is still laughing after the “event” it November.  My guess would be “no”.

~McQ

Twitter: @McQandO