Tag Archives: oil price

Pelosi’s Politburo (CFIF)

No fair up-or-down votes on lifting Congressional bans on domestic oil drilling!
While the American people suffer from record-high gas prices, that is the message — loud and clear — from Speaker of the House Nancy Pelosi and her liberal colleagues!
In fact, Pelosi and Company are so dead set against alleviating the pain Americans are feeling at the pump that she hurriedly banged down the gavel, adjourned Congress and FLED from Washington for a five-week vacation.
And, when a group of conservative legislators tried to speak directly to the American people about the need for Congress to address our nation’s energy crisis before skipping town, Pelosi ACTUALLY turned off the microphones, shut off the cameras and turned out the lights!
Right now, many Americans can’t afford to go on vacation because of the high price of gasoline. But that didn’t stop Nancy Pelosi from taking her five-week summer recess.

In defense of her egregious actions, all she could do several days ago was rant:
“I’m trying to save the planet; I’m trying to save the planet. I will not have this debate trivialized by their excuses for their failed policy.”

“Trying to save the planet?” How many people will have to suffer before she declares the world safe?

And moreover, what “failed policy” is Pelosi talking about? President Bush and conservative legislators are calling for the REVERSAL of a 30-year policy of limiting domestic drilling. They are trying to reduce America’s dependence on foreign oil by responsibly increasing our domestic supply.

How can a policy that hasn’t been implemented in 30 years be a “failed policy?” Is Pelosi that out of touch with the 70% of the American people who support more domestic drilling?
Well guess what? Pelosi and her minions might be able to run but they can’t hide (Members of Congress have fax machines in their district offices too).
And we’re not going to let Pelosi get away with her callous obstruction while Americans are suffering, in large part, because Pelosi objects to any and all new domestic drilling!

Despite what Nancy Pelosi may think, this is not the former-Soviet Union! Nancy Pelosi cannot single-handedly repress free speech and callously disregard the will of the American people.

She needs to be put in her place and told this is not the way things work in the United States of America!
President Bush has the power to call Congress back into session and Congressional leader have that power as well!


A Reagan Moment

By INVESTOR’S BUSINESS DAILY | Posted Monday, June 16, 2008 4:20 PM PT

Campaign ’08: The mainstream media are agog about the return of Ross Perot. But all he gave us was eight years of Bill Clinton and increased dependence on foreign energy. What we need is another Ronald Reagan.

Read More: Election 2008


He’s ba-a-ack, and the Los Angeles Times, for one, is glad for it. Calling our current economic situation “A Perot Moment,” the Times has declared it’s 1992 all over again and that Perot’s economic advice is as good as ever.

It credits the mouth that roared for using “dramatic charts and rattling off unsettling statistics” 16 years ago to raise the deficit issue and persuade “Congress to approve a package of tax hikes that, combined with a growing economy, yielded the first federal budget surpluses in nearly 30 years.”

We remember it differently. We remember a Bush economy Clinton inherited that grew at an impressive annualized rate of 3.8% in the fourth quarter of 1992. We remember Ross Perot bad-mouthing an economy roaring forward, helping Bill Clinton get elected with just 43% of the vote.

We remember that it kept growing largely due to the defeat of Clinton schemes like Hillary’s attempt to nationalize health care and the job- and economy-killing BTU tax. We remember the election of a GOP Congress in 1994 that put the brakes on future Clintonian spending and taxing excesses.

Columnist David Broder of the Washington Post is also happy “Perot is about to dip a toe back into the public debates” and that “he’s bringing his charts back with him” via a new Web site. Broder also credits Perot with raising the deficit issue and with leading the Clinton administration to abandon its promise of middle-class tax cuts. That’s a good thing?

The biggest threat to our economic and national security today, however, isn’t higher deficits but rising energy prices. Congress refuses to develop our abundant domestic energy reserves in the face of rising demand. Instead, Obama and friends want to raise energy prices even more through “windfall” taxes on producers. Perot, interestingly, supported a 50-cents-a-gallon tax increase in 1992.

We don’t need the second (or is it third) coming of Ross Perot. We need someone to step up and grab the mantle of Ronald Reagan. In his speech accepting the GOP nomination in 1980, Reagan warned of those who “tell us to use less, so that we will run out of oil, gasoline, and natural gas a little more slowly” and said, “America must get to work producing more energy.”

In words that could apply to the current Congress, Reagan said: “Large amounts of oil and natural gas lay beneath our land and off our shores, untouched because the present administration seems to believe the American people would rather see more regulation, taxes and controls than more energy.”

In 1987, eight years before Bill Clinton vetoed such a proposal, Reagan asked Congress to open ANWR, submitting with his proposal a required report showing that it could be done safely while adding a million barrels daily to domestic supply. John McCain, who proclaims himself a foot-soldier in the Reagan revolution, should take note.

We need to raise domestic energy production, not taxes, to keep the lights in Reagan’s shining city on a hill turned on.


Critique of O’Reilly’s Article – Oil Price Economics

Bill O’Reilly of Fox News fame states in a recent article that energy independence is a national security issue. With that subject I agree, however, it is the predicate of his argument – namely, that big oil interests (e.g., petrol corporations and OPEC) are responsible for high gas prices – with which I take exception. O’Reilly’s role as a television news anchor notwithstanding, sensationalist rhetoric dodging the point at issue by Red Herring which points to the symptoms of the problem rather than the cause is naive at best and irresponsible at worst.

The US consumer is at fault here, not Iran or the mullahs, for high and rising oil prices. If household balance sheets were in order, our external debt position would not be where it is today. Moreover, if households collectively exercised prudence with regard to their political decisions surrounding the government budget (the other constituent part of our ‘twin deficits’), and specifically regarding our entitlements crises (e.g., Medicare and Social Security), by electing officials who would put an end to the abuse of unaccountable government spending facilitated via the laundering effect of statist welfare mechanisms or by simply voting away these monstrosities via referendum, our spending power, hence the price of goods such as oil, would be much different.

The rationale to back the premise that household profligacy leads to higher prices is thus: the market is more or less efficient in that investors, traders, merchants, and the like do not want to put themselves at more risk than necessary to make a living. Hence, there are limits to supply and demand, limits facilitated by the price mechanism.

(Disclaimer:  If you wish to skip the wonkery, pass by this paragraph and you won’t lose any meaning behind my point.) The elasticity of demand for and supply of goods determines what degree supply and demand changes affect the [equilibrium, or market clearing] price. To be sure, the elasticity of demand for oil increases as the price rises as a percentage of household income. However, conjoined with other factors such as necessity and lack of proper substitutes, the relative inelasticity of demand for oil leads to consumption patterns which do harm to household balance sheets in the aggregate. Thus spending, investment, production, and employment growth in the economy is duly constrained. On the supply side, elasticity is affected by, among other things, the existence of raw materials (e.g., crude), production spare capacity (e.g., OPEC’s ability to put more petroleum onto the market), the length of the production process (e.g., refining Canadian tar sands) coupled with factor immobility and time (e.g., drilling and exploration).    

American money is worth less than it used to be due to the monetary approach to the balance of payments whereby, according to Krugman and Obstfeld, “An increase in the supply of domestic currency bonds that the private sector must hold raises the risk premium on domestic currency assets,” (524, International Economics Theory and Policy). In other words, our trade deficit is financed, indirectly, via US government treasuries, among other securities. And the more financing activity we pursue (e.g., via household debt) the higher the risk premium we have tacked on to the price of our money. Therefore, purchasing power is directly linked to our spending activities – i.e., there is a causal link between debt and inflation.

The argument can also be made that the US is exporting inflation from wars in the Mid-East as financing overseas adventures puts a strain on government coffers. That oil prices are blowback of government overextension. Yes, that point is well received, however, government defense appropriations still do not make up nearly the proportion of the budget as entitlements (e.g., war = 20% while SS and Medicare = 60%). Moreover, estimates project that 2/3 of our economic growth has been consumption based. This suggests that the impact from government spending on war has had concomitant effects in the domestic economy (on the demand side), which have led to the impacts we now face in terms of our purchasing power [parity] reflected in higher prices.

The strength of the dollar, essentially, is determined by, among other things, our capital position (e.g., net assets or deficits) and future income earning potential coupled with past performance (e.g., market returns) and overall risk (e.g., default rates). When investors, traders, merchants, foreign sovereign wealth holders, etc. look at the US and its indefinitely increasing entitlements overhang (e.g., $42 Trillion Social Security and Medicare debt projected over the next 75 years) coupled with its increasingly stagnant economic growth (e.g., due to normal business cycle fluctuations), lending to decadent and irresponsible Americans looks less than appealing.

The meaning of our present condition lies much deeper than the vacuous notions propagated by populist demagogues of price manipulation for ‘windfall profits.’ The cost of oil is a proxy for a downgrade in [worldwide] investment opinions of the United States and these opinions reside in and are buttressed by rational economic expectations.

Pressure from oil prices spreads

By Louis Uchitelle The New York Times
Sunday, June 8, 2008

Rising oil prices are beginning to cut into the profits of a wide range of businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.
Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil, which shot up almost $11 a barrel Friday, to a record $138.54.
Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers or all three?
In the United States, Goodyear Tire & Rubber is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.
These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.
“Our strategy is to raise prices and improve the mix to offset the cost of raw materials,” said Keith Price, a Goodyear spokesman. “No one has predicted how long we can continue to do that.”
The sense that many companies may be hitting a wall is palpable. U.S. corporate profits peaked last spring and have shrunk since then, Moody’s Economy.com reports, drawing on U.S. Commerce Department data.
The housing crisis and the weakening U.S. economy are big reasons, but oil prices are adding greatly to the pressure on profits as U.S. retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.
So far this year,  employers in the United States have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.
“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief U.S.  economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”
Still, the prevailing attitude that the U.S. economy can just keep absorbing higher oil prices is being tested – for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.
“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”
Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.
Since last spring, the average profits of U.S. businesses – from behemoths like Goodyear to small neighborhood retailers – have declined at an annual rate of nearly 6 percent, government data show.
Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain, which offers a wide array of consumer goods, food, wine, furniture, appliances, beauty aids and much more.
Costco’s profit was up in the first quarter, but  its chief executive, James  Sinegal, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.
“We just made a big purchase of Tumi luggage,”  Sinegal said.
Procter & Gamble finds itself in a similar predicament. For its fiscal year that begins next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double the increase last year, and it is carved from total revenue of just under $80 billion.
Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.
Natural oils have been substituted for ingredients made from petroleum; for example, palm oil now goes into a variety of laundry soaps. But like rubber, the cost of palm oil and other natural commodities is rising.
Trying to hold down raw material costs, Procter & Gamble has resorted to “compacting” a few laundry products, Fox said, so that the same amount of detergent fits into smaller and less costly containers made of plastic, which is derived from oil.
Still, the company’s operating profit edged down to 20.1 percent of revenue in the first quarter, from 21.9 percent in each of the two previous quarters. “That 20.1 percent was down, but it was an improvement on the advance guidance we had given for that quarter,”  Fox said.
No business in the United States produces more of the oil-based ingredients that go into American products than the Dow Chemical Company, based in Michigan. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.
Paint, computer and television screens, cellphones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.
Dow normally raises prices piecemeal. Last month, though, the rising cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent.
“We have taken out head count, automated, been very diligent on cost control,” said Andrew Liveris, Dow’s chairman and chief executive, “but these surges in energy prices are just one surge too many.”
Dow’s sweeping price increases will probably have a domino effect, resulting in higher prices or, more likely, shrinking profits, analysts say.
Constrained by the weak U.S. economy and fewer wage earners among their customers, American retailers have so far not been able to pass on to consumers much of the rising cost of products that depend on oil.
The U.S. Consumer Price Index, minus food and energy, is barely rising.
“One of the surprises,” said Patrick Jackman, a senior economist in the consumer price division of the Bureau of Labor Statistics, “is that the oil price surges of the 1970s passed through fairly quickly into consumer prices, and this time that is not happening.”



Jim Hamilton Becomes a Bear (Brad DeLong)

He writes:

Econbrowser: The oil shock of 2008: Time to reassess the potential for recent oil price increases to contribute to an economic downturn…. [W]hen oil prices started to rise again five years ago, many of us suggested that… because the price was rising much more gradually… [it] should be less disruptive of consumer spending patterns [in the 1970s, and]… oil was still cheaper than it had been historically if you took into account inflation…. [N]either of those claims… [is] true [any longer]….

[E]nergy expenditures had fallen… significantly as a fraction of total income… that, too, is no longer the case… crude oil consumed as a fraction of GDP… fell as low as 1.1% in 1998, but is up to 5.2% so far in the first quarter of 2008…. We’ve reached the point where American businesses and consumers simply can no longer afford to ignore the price of fuel, and we’re getting clear indications of real changes in behavior….

U.S. vehicle miles traveled fell 4.3% in March… gasoline consumption so far in 2008 has been 70,000 barrels/day lower than in the first five months of 2007…. Sales of light trucks manufactured in North America last month were 26% below the level of May 2007… the real value of U.S. motor vehicle production fell by $44 billion between 2007:Q3 and 2008:Q1…. GM this week announced plans to close 4 North American plants, idling an additional estimated 8,000 workers. Ford plans a 15% cut in its 24,000 salaried employees. Continental Airlines announced plans to cut 3,000 jobs in response to higher fuel prices, following similar announcements from United, Delta, and American….

We dodged a recession (at least through most of 2007) despite a dramatic housing downturn. The modern American economy could perhaps also continue to grow through the kind of effects we saw from the oil price spike of 1990. But what if we have to deal with both sets of problems at the same time?
I’m afraid we’re about to find out.