Predicting Oil and Gas Prices: 2009-2016

Abstract

In the United States, there exist robust linear trends in the differences between headline (or core) CPI and price indices for individual subcategories of goods and services such as energy, food, housing, etc.

Chiefly these differences can be represented by a piece-wise straight line. The periods of the transition from one trend to another are characterized by an elevated volatility. The difference between the core CPI and the price index for motor fuel can be also accurately approximated by several straight lines. In 2008, the negative trend was replaced with a positive one, and thus, a very high volatility in motor fuel price was observed, with an extension into 2009.

The change in the trend was accompanied by an “overshoot” in the price for motor oil, which dropped much lower than that expected from the new trend. Therefore, the difference has to return to the new positive trend in 2009. During the recovery period, the index for motor fuel will grow by 90 units or 50%. The price for motor fuel in the US will also grow by 50% by the end of 2009. Oil price is expected to rise by ~50% as well, from its current value of ~$50 per barrel.

Therefore, the fair price is not a fixed value but a linear function of time.

Key words: CPI, motor fuel price, prediction, US

JEL Classification: E31, E37

Introduction

The change in consumer prices is an eternal concern of any economy. In developed countries, the overall level of prices is the responsibility of central banks. Both high price inflation and deflation are considered by the mainstream economics as malicious phenomena which must be avoided by any means.

This is not a correct presumption, however, because inflation in advanced economies is driven only by the change in labor force [1-8]. There exists a linear lagged relationship between inflation and the rate of labor force change, which allows prediction of inflation at various time horizons from current estimates of workforce and its projections.

Therefore, the overall price inflation can be accurately estimated, but any artificial restriction of inflation using monetary tools may result in the (possibly lagged) increase in unemployment [4].

Having a reliable forecast of the overall consumer price index (CPI) one can design a sound monetary policy, what is the primary objective for monetary and economic authorities. On the other hand, the overall CPI depends on the evolution of individual goods and services.

Initially we found the presence of long-term linear trends in the difference between headline CPI and core (i.e. the headline one less food and energy) CPI [9]. Then we revealed that the differences between the headline (core) CPI and indices for individual expenditure categories such as energy, food, housing, and transportation is similar to that between the core CPI and headline CPI.

Using the presence of piece-wise linear trends in corresponding differences we predicted [9] that “the index for energy will reach the level of the core CPI in 2008. Then, one should not expect further increase in energy price beyond that dictated by the headline CPI. It is likely that oil price will be falling in absolute terms.”

Now we can state that this prediction is correct: crude oil price reached ~$150 and then dropped to ~$40. Correspondingly the price index for energy lost around 80 units during very short period. A relevant finding was the presence of high volatility during the transition between adjacent linear trends, as was observed with the oil price in 2008 and 2009.

Analysis of the difference between the headline CPI and such small individual subcategories as apples and oranges also revealed the presence of linear trends [10]. One of the studied subcategories was fuel oil for housing purposes, which was shown to be dependent primarily on oil price. All in all, the evolution of the price indices for even tiny subcategories relative to the CPI is not a stochastic process.

This finding allows predicting prices of practically all goods and services. Such predictions include timing of the changes in linear trends.

1. The Model

As derived in [9,10], the difference between the core (or headline) CPI, cCPI, and individual indices, iCPI, can be described by a simplest time function :

cCPI(t) – iCPI(t) = A + Bt (1)

where A and B are empirical constants, and t is the elapsed time. Therefore, the “distance” between the core CPI and some individual index is a linear function of time, with a positive or negative slope B.

The difference between the core CPI and (headline) CPI provides the best demonstration of the presence of linear trends. Left panel of Figure 1 displays the difference between 1960 and 2009. There are three distinct periods of linear dependence on time: from 1960 to 1980, from 1980 to 2000, and from 2001 to 2008.

There are also two turning points in 1980 and 2001, where the trends undergo changes. Both turning points are characterized by an elevated volatility. Currently, the difference is passing third turning point with very high volatility caused by the uncertainty in the characteristics of the following trend.

The right panel of Figure 1 presents quantitative parameters of the linear trends. Between 1980 and 2000, the difference was growing at a rate of 0.67 units per year. Between 2001 and 2008, the difference underwent a rapid fall at a rate of 1.6 units per year. Both trends are reliable ones with high goodness-of-fit. A fundamental feature of the difference consists in the fact that all deviations from the trends were only short-term ones.

This implies that current or future deviations from the new trend, which has been under development since July 2008, should be rapidly compensated. This feature will be used to predict the price for motor fuel in the next section.

Figure 1. Illustration of linear trends in the difference between core and headline CPI in the U.S. Left panel demonstrates the full history of the difference between January1960 and March 2009. There are three quasi-linear segments with two turning points near 1980 and 2000. Currently, the difference passes third turning point. Right panel displays two linear trends with relevant linear regression lines.

2. Prediction

Having a relationship (1) describing the evolution of the difference between the core CPI and individual indices, one can easily predict its short- and long-term evolution. Figure 2 depicts time history of the differences for the index for energy and motor fuel. In general, both time curves are similar to that in Figure 1 with an exception of amplitude. The index for motor fuel has suffered larger deviations from the core CPI and is characterized by higher volatility than the index for energy. Otherwise, both differences evolve in sync.

Figure 2. Evolution of the price indices for energy and motor fuel relative to core CPI.

The period between 2008 and 2010 is characterized by an extraordinary high volatility in both differences. The new linear trend is under development and it is difficult to accurately estimate the rate of future growth. A naive assumption is that the following period will be a “mirror reflection” of the previous one. Therefore, the new slope should be the same as the old one but with opposite sign. Figure 3 shows the new trend by solid red line – the difference will grow from -60 in 2008 to +80 in 2015.

Figure 3. The difference between the core CPI and the index for motor fuel. Red filled circles predict the evolution of the difference between March and December 2009. Total increase in the difference is +90 units of index or +50%: from 173 in March to 263 in December. Solid red line represents the “mirror” trend for that between 2002 and 2008, which is shown by solid black line.

In March 2009, the difference was at the level of +45, i.e. much higher than the level predicted by the new trend. As happened in the past with numerous individual price indices [9,10], such a strong deviation (one might call it “dynamic overshoot”) should be compensated in the near future.

Without loss of generality, we have restricted the recovery to the trend by the end of 2009. As a result the index for motor fuel should growth by 90 units during the next 9 months, or by 10 units per month. Red filled circles represent the evolution of the difference from April to December 2009. In 2010, the difference may undergo an overshoot in the opposite direction with additional rise in the index for motor fuel.

Translating indices into prices, the rise in the difference by 90 units (from 173 in March to 263 in December) means an increase in price by 50%. Therefore, it is very likely that the price for motor fuel in the beginning of 2010 will be 60% to 70% larger than in March 2009 due to the overshoot.

Correspondingly, the price index for energy, and thus, oil will also be growing in 2009 and likely in the first half of 2010. Sitting in May 2009, we observe a robust growth in oil price and futures. In any case, the difference should return to the new linear trend shortly.

Conclusion

The price index for motor fuel in the USA should grow by ~50% in 2009 – from 173 to 263 in order to intersect the long-term trend line. Accordingly, the price for motor fuel should grow by 50% from its March level. The rise in the price will be following up the growth in energy (including oil) price.

Therefore, the headline CPI, which includes energy and food, will be growing faster that the core CPI in 2009 and the consumer price inflation will be positive.

The title of this paper refers to some fair price for motor fuel. Unlike many researches, policy makers, and businessmen we treat no fixed price as a fair one. The price index for motor fuel (and for other subcategories of goods and services) evolves relative to the core CPI as a linear function of time. Such evolution must be caused by a huge number of mainly uncontrolled interactions between economic agents. Therefore, the straight line representing the observed trend consist of “gravity centers” to which the difference must converge over time. This line defines the fair price of motor fuel at any time. Because the evolution of the headline and core CPI in the United States is predetermined by the change in labor force, the problem of the fair price is completely resolved.

Observed deviations from the fair price line are related to market sentiments caused by the uncertainty in the estimates of the future inflation and real economic growth. This uncertainty can be substantially reduced when the market will understand the inevitable character of linear trends and the dependence of the overall inflation on the change in labor force.

References

1. Kitov, I. (2006). Inflation, unemployment, labor force change in the USA, Working Papers 28, ECINEQ, Society for the Study of Economic Inequality
2. Kitov, I., (2006). Exact prediction of inflation in the USA, MPRA Paper 2735, University Library of Munich, Germany.
3. Kitov, I., Kitov, O., Dolinskaya, S., (2007). Inflation as a function of labor force change rate: cointegration test for the USA, MPRA Paper 2734, University Library of Munich, Germany.
4. Kitov, I., (2007). Inflation, Unemployment, Labor Force Change in European countries, in T. Nagakawa (Ed.), Business Fluctuations and Cycles, pp. 67-112, Hauppauge NY: Nova Science Publishers
5. Kitov, I., (2007). Exact prediction of inflation and unemployment in Japan, MPRA Paper 5464, University Library of Munich, Germany.
6. Kitov, I., (2007). Exact prediction of inflation and unemployment in Canada, MPRA Paper 5015, University Library of Munich, Germany.
7. Kitov, I., (2007). Exact prediction of inflation and unemployment in Germany, MPRA Paper 5088, University Library of Munich, Germany.
8. Kitov, I., Kitov, O., (2009). Unemployment and inflation in Western Europe: solution by the boundary element method, MPRA Paper 14341, University Library of Munich, Germany.
9. Kitov, I., Kitov, O., (2008). Long-Term Linear Trends In Consumer Price Indices, Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 3(2(4)_Summ), pp. 101-112.
10. Kitov, I., (2009). Apples and oranges: relative growth rate of consumer price indices, MPRA Paper 13587, University Library of Munich, Germany.

Disclosure: No positions

Comments

[Mad Hedge F...:]

It's even worse. I chatted with Jeff Rubin , former chief economist with CIBC World Markets, who reaffirmed my own hyper-bull case for crude in bucketfuls. He was in San Francisco, admiring our civic planning and mass transit system, as part of a tour to promote his new book “Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization.” We are in the bottom of the ninth inning of the hydrocarbon age. The next super spike will take us to over $100/barrel within 12 months of the beginning of an economic recovery, and much higher after that. The problem is that we are losing 4 million barrels/day through depletion just when demand is increasing. The only offset will be dirty, foul, huge carbon footprint, $100/barrel Canadian tar sands, which will double, to account for 40% of our imports. The biggest increase in consumption is in OPEC itself, where consumption has ballooned to 13 million barrel/day and oil is being wasted on a prodigious scale, compared to only 7 million b/d in China. Gas there costs only 25 cents/gal, utilities in Saudi Arabia pay only three cents/gallon for bunker fuel, and Dubai is blowing 3,000 b/d equivalent running an indoor ski resort. Oil over $100/barrel will bring globalization to a screeching halt. Economies will go local because it will cost too much to transport goods, as we have in the past. No more California avocados in Toronto. More importantly, no more Chinese steel in the US, or any other heavy exports, which will lead to a resurgence in domestic manufacturing and the jobs that come with it. Last year $90 of the $600 cost of Chinese steel went to shipping costs. $10/gal gasoline will take 50 million of our 240 million cars off the road. Even if we replace them with electric cars, we don’t have the power grid to juice them. Chinese exports will collapse, but so will their Treasury purchases, meaning no more bailouts for us. Oops. Subprime neighborhoods will get plowed back into farmland so we can eat. I think Jeff is dead on about oil prices. But as necessity is the mother of invention, some of his predictions about their impact on international trade are a bit extreme for me.

Jun 24 07:53 AM

[Speedspirit:]

It been reported that the British Empire was caught in the act as its agents were working intensively to turn a legitimate protest against the June 12 presidential elections in Iran, into a bloody "revolution" where they used frustrated youth through electronic channels to rise against the government. All the destabilizing efforts will ignite the entire region where the shipping of US dependent oil must come from. Which can only lead to higher prices on top of hyperinflation heading our way. Step by little step.

Jun 24 08:16 AM

[Davewmart:]

Madhedgefundtrader,
I would concur with most of your remarks on oil price.
I feel though that you might be interested in analysis of the impact of EV's on the grid, which appear to be far less than you fear.
Here is the 'traditional' analysis, in which several government and quasi-government organisations have concluded that the impact of the introduction of EV's and hybrids would have on the grid is very limited, particularly if smart charging is used, so that most people save money by charging when electricity is cheap and plentiful:
www.oemtek.com/pdf/phe...
(PDF)
The reason for that is that EV's do a lot more for a given amount of energy than an internal combustion engine - they only need around 300/watts/mile, so even after you take out for the inefficiencies of generating electricity, you are way ahead of the game compared to ICE.

However, a recent analysis indicates we can transfer to EV cars without using any more electricity at all!
How is this magic achieved?
The writer simply deducts the huge amounts of electricity needed to refine oil, and allocates that to running cars!
evworld.com/article.cf...
There would remain some issues, such as that the places where electricity was used for refining would not be the same as those where the EV's would consume power, but in general there would not seem to be a problem powering them.

A more substantial objection to building a vast fleet of EV's and plug-ins anytime soon is restricted battery supply.
The rare earths used, lithium and Lanthanum (for NiMH batteries) are in fact not rare at all, but opening up new mines is a time-consuming business, and the cheapest sources for lithium in Bolivia have an uncooperative Government.
Some argue that advanced lead acid will fill the gap, but they do not, as far as I can find out, appear to be being investigated by any large car manufacturers for the purpose, and engineering a car for a radically different battery type and testing it is time consuming and expensive. About the same as opening a mine, in fact.
Currently advanced lead-acid batteries retail for around the same as NiMH, which is a mature and well-understood technology, in contrast to advanced lead-acid, which is radically different from your traditional car battery.
Lithium batteries are at a relatively early stage of development, and have good potential for cost reduction and performance improvements, but it is early days and we are far from multi-million production.

The bottom line is that EV's and plug-in hybrids can do the job, but there will not be a smooth transition to the ability to maintain present American patterns of commuting and living via electric.

As a guesstimate, from your 50 million cars coming off the road, you might be looking at 5 million or so EV's in their stead.

Jun 24 08:33 AM

[john s. gordon:]

would love to see the exported jobs come back home. we need a balanced u.s economy, not one that is 99% financial manipulation.
> jack

Jun 24 08:44 AM

[A Barrel Full:]

Oil prices over the last few years were driven by emerging markets, not the USA.

The price of oil is currently kept up by Opec cuts. The trend over the next year will be all about production creep.

Jun 24 09:19 AM

[billp37:]

"All the destabilizing efforts will ignite the entire region where the shipping of US dependent oil must come from. "

Let's hope not.

We've been working toward peaceful settlement of these unfortunate matters.

And our peaceful settlement efforts recently cost us $22,036.00 which we are in the process of trying to get back.

Press on

Nothing in the world can take the place of persistence.
Talent will not; nothing is more common than unsuccessful men with talent.
Genius will not; unrewarded genius is almost a proverb.
Education will not; the world is full of educated derelects.
Peristence and determination alone are omnipotent.

Calvin Coolidge

Jun 24 09:55 AM

[The Greates...:]

The reason for the rise in crude oil prices:
Persons within the United States seeking to trade key US energy commodities – US crude oil, gasoline, and heating oil futures – are able to avoid all US market oversight or reporting requirements by routing their trades through the ICE Futures exchange in London instead of the NYMEX in New York.
For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Jun 24 10:51 AM

[anarchist:]

I would like you to elaborate on the statement:"We've been working toward peaceful settlement of these unfortunate matters", not sure who the "we" are, certainly not the U.S.
>
> Let's hope not.
>
> We've been working toward peaceful settlement of these unfortunate
> matters.
>
> And our peaceful settlement efforts recently cost us $22,036.00 which
> we are in the process of trying to get back.
>
> Press on
>
> Nothing in the world can take the place of persistence.
> Talent will not; nothing is more common than unsuccessful men with
> talent.
> Genius will not; unrewarded genius is almost a proverb.
> Education will not; the world is full of educated derelects.
> Peristence and determination alone are omnipotent.
>
> Calvin Coolidge

Jun 24 11:06 AM

[Jimbo:]

Speedspirit: Methinks your "report" of Brits fomenting revolution in Iran comes from folks who have been smoking some really good stuff.

Jun 24 11:21 AM

[Mayer Amsch...:]

Ivan,
I find this a little hard to read and feel like it doesn't make any sense to try to predict fuel prices from core CPI - yes, core CPI is a more stable number to relate food or fuel prices to, but it's not like a moving average. I think that predicting core CPI from an oil-price moving average based on their normal relationship makes more sense.

Jun 24 02:34 PM

[blu:]

Over 35% of the traffic on interstate highways are eighteen wheelers.
They don't quite get the mileage that cars get.
There is no electric motor that will move a big rig efficiently.
EV's are like ethanol... a bad joke to be played on the public.
But you can bet our new socialistic government will force EV's down our throats just as was ethanol.

Jun 24 02:43 PM

[Ivan Kitov:]

As a matter of fact, I do not predict CPI or core CPI. We use them as they are - straight from bls.gov/data. When you retrieve both time series and find their residual, you could reveal that the residual, i.e. the difference between the core CPI and headline CPI, has sustainable (linear) trends. This is an observation, not a model or assumption. This trend allows prediction of the difference at ba several-year horizon. When in the beginning of a linear trend one can see far beyond nowdays.
At the same time, the difference between the core and headline CPI depends on oil price. Becasue the headline CPI contains energy price and the core CPI - does not contain. So, the evolution of the difference is related to the evolution of energy (i.e. oil) price.

I did my best with langage, which is obviously a Russian-style, but in any case it is a scientific paper with a strict composition - data-model-results-fin... Can do nothing about it.

On Jun 24 02:34 PM Mayer Amschel Rothschild wrote:

> Ivan,
> I find this a little hard to read and feel like it doesn't make any
> sense to try to predict fuel prices from core CPI - yes, core CPI
> is a more stable number to relate food or fuel prices to, but it's
> not like a moving average. I think that predicting core CPI from
> an oil-price moving average based on their normal relationship makes
> more sense.

Jun 24 03:22 PM

[The Greates...:]

It is not about supply and demand anymore, it is about control of the market that supplies the product.

Jun 24 03:43 PM

[JeffDB:]

On Jun 24 02:43 PM blu wrote:

> Over 35% of the traffic on interstate highways are eighteen wheelers.
>
> They don't quite get the mileage that cars get.
> There is no electric motor that will move a big rig efficiently.

Interestingly enough, Caterpillar now has a hybrid full sized earth mover run by an electric motor. No battery storage, though:

reviews.cnet.com/8301-...

Jun 24 05:42 PM

[Davewmart:]

blu,
Electric power being unsuitable for long-distance lorries does not mean it is useless in, for instance, urban commuter cars.
Efficiency in that respect would be most easily gained by transferring as much as possible to rail, and only trucking it from the depot.
This would vastly reduce wear on road surfaces too, as trucks cause thousands of times the damage of cars.
Here is a road-rail combination:
www.silvertipdesign.co...
In addition manufacturers such as Mercedes-Benz are looking at making trucks into series hybrids, where the diesel engine feeds through an electric motor.
Due to their large surface area trucks in hot climates such as Arizona or Australia if they had PV cells on their roofs could certainly contribute to powering cooling and ancillary equipment, and perhaps also to cruising once speed has been attained,

Jun 24 05:45 PM

[JeffDB:]

On Jun 24 08:33 AM Davewmart wrote:

> The bottom line is that EV's and plug-in hybrids can do the job,
> but there will not be a smooth transition to the ability to maintain
> present American patterns of commuting and living via electric.

Perhaps it wouldn't be as bad as we fear, however. The Plug-in Hybrid Electric Vehicles www.calcars.org/ look like they wouldn't take much of a change in lifestyle if any, if the engines used to keep the batteries charged are sized correctly.

Even the "pure electrics" have some credible companies gearing up to provide infrastructure, for vehicles to recharge at work, restaurants, ball-parks etc. and battery swap out stations which can reload the vehicle with a fresh battery in less time than it would take to refill it with gasoline, much like switching out propane tanks for gas grills etc.

Better Place, www.betterplace.com/so.../ is already lining up contracts for that infrastructure in Israel and Ireland and perhaps Hawaii among others a bit later.

Jun 24 06:00 PM

[Davewmart:]

Jeff,
The problem is the battery production, and how fast oil prices rise, coupled with our poor financial position.
I can't see them ramping up battery production fast enough to fill the gap.
Some feel that advanced lead acid might do it, but I would have thought that the companies will take some years to re-engineer for that option as they apparently aren't doing it at the moment.
It should be noted though that all this is a very much greater problem for the US, Canada and Australia than Europe and Japan, where most don't absolutely need a car at all and public transport is far more appropriate for many.
In my own city, Bristol, UK, something like this would do the job much better than currently, with the streets permanently clogged:
www.taxibus.org.uk/
Paris, for instance, is to introduce 4,000 EVs to share:
www.guardian.co.uk/wor...
Meanwhile, deliveries can switch to electric - it is a lot easier in the town:
findarticles.com/p/art...

It boils down to that things are a lot easier in Europe and Japan than the US.
My guess is that if there are problems they might switch to natural gas as an interim measure.

Jun 24 06:36 PM

[JeffDB:]

Thanks for sharing your work, Ivan.

I think it is probably a little more accurate from a prediction standpoint than an article here about a year ago comparing & graphing oil & gold prices (1), though both are interesting exercises.

On the other hand, I think there might still be a couple of issues that perhaps should be taken into account. One would be the veracity of the government numbers. The website, Shadow Government Statistics, for instance takes issue with those government stats: www.shadowstats.com/

It does look to me, however, from that front page, that the actual shape of the graphs of their numbers vs the govt numbers are about the same so perhaps the relationship between either one and oil prices would be relatively constant as well, just at somewhat different values.

A bigger issue, however, from a prediction standpoint, would be the possibility of a paradigm shift, in the relationship. If the "Peak Oil" theorists are correct and we reach that point where increases in supply to meet increasing demand can no longer be maintained, or maintained at expenditure levels previously in play, there could be a break in any previously existing relationship between your two variables. It could possibly be a radical break, and it could also be one that is not recognized right away if there are a lot of other variables or distractions and "noise" to confuse things.

In fact, it looks to me like such a break may already have occurred when looking at a chart on the inflation adjusted price of oil. (2) www.inflationdata.com/... It looks to me as though prices were fairly steady on an inflation adjusted basis, then there was an anomaly in the '70s & 80s, but then it returned to "normal" before breaking with the prior levels in about 2002 to 2004 and embarking on a significant upward trend.

I could be off, of course, but those do seem to be things to at least be aware of.

1. Why Are Oil Prices So High? Gold Solves the Riddle
by Logan Flatt
seekingalpha.com/artic...

2. Inflation Data.com Historical Crude Prices
www.inflationdata.com/...

Jun 24 06:38 PM

[JeffDB:]

On Jun 24 06:36 PM Davewmart wrote:

> Jeff,
> The problem is the battery production, and how fast oil prices rise,
> coupled with our poor financial position.
> I can't see them ramping up battery production fast enough to fill
> the gap.
> Some feel that advanced lead acid might do it, but I would have thought
> that the companies will take some years to re-engineer for that option
> as they apparently aren't doing it at the moment.
> It should be noted though that all this is a very much greater problem
> for the US, Canada and Australia than Europe and Japan, where most
> don't absolutely need a car at all and public transport is far more
> appropriate for many.
> In my own city, Bristol, UK, something like this would do the job
> much better than currently, with the streets permanently clogged:
>
> www.taxibus.org.uk/
> Paris, for instance, is to introduce 4,000 EVs to share:
> www.guardian.co.uk/wor...
>
> Meanwhile, deliveries can switch to electric - it is a lot easier
> in the town:
> findarticles.com/p/art...
>
> It boils down to that things are a lot easier in Europe and Japan
> than the US.
> My guess is that if there are problems they might switch to natural
> gas as an interim measure.

Yeah, I agree with that. A lot does boil down to the time frame. It does seem to me that if forced to we could use some other battery technologies instead of or in addition to lithium ion etc. I was a little surprised that in the early 1900s electric vehicles were more common that ones with internal combustion engines: en.wikipedia.org/wiki/...

I guess if we had to we could use the old nickel-iron batteries, lead-acid or some other variation: en.wikipedia.org/wiki/...

Natural gas could be an option as well, but it too would require a change in infrastructure, and could not be accomplished quickly on a massive scale without quite a bit of disruption.

My hope is that even a gradual transition will be sufficient to prevent an earthquake type forced transition.


I suppose natural

Jun 24 06:56 PM

[Mayer Amsch...:]

Ivan,
I suppose what I'm saying is that, when the banking system and economy function normally, core CPI and headline CPI will be very closely related. However, since core CPI measures finished goods and oil is a crude good, I believe that core CPI follows trends that fuel costs do since fuel costs affect every level of production and distribution, thus resulting in the correlation that your graphs show. When global credit markets, crude good prices, and the dollar all start behaving differently and more erratically than they have for the past 70 years, it seems to me that this correlation will break down.
However, I'd like to say that I appreciate how thorough and straightforward your article is.

On Jun 24 03:22 PM Ivan Kitov wrote:

> As a matter of fact, I do not predict CPI or core CPI. We use them
> as they are - straight from bls.gov/data. When you retrieve
> both time series and find their residual, you could reveal that the
> residual, i.e. the difference between the core CPI and headline CPI,
> has sustainable (linear) trends. This is an observation, not a model
> or assumption. This trend allows prediction of the difference at
> ba several-year horizon. When in the beginning of a linear trend
> one can see far beyond nowdays.
> At the same time, the difference between the core and headline CPI
> depends on oil price. Becasue the headline CPI contains energy price
> and the core CPI - does not contain. So, the evolution of the difference
> is related to the evolution of energy (i.e. oil) price.
>
> I did my best with langage, which is obviously a Russian-style,
> but in any case it is a scientific paper with a strict composition
> - data-model-results-fin... Can do nothing about it.
>
> On Jun 24 02:34 PM Mayer Amschel Rothschild wrote:

Jun 24 09:59 PM

[blu:]

davew,
I have long advocated the maximization of the railroads, however it was brought to my attention that the unionized truckers and unionized railroad folks don't see eye to eye, and at present the truckers outnumber the railroaders. So it is likely that the truckers will have their way and keep their inefficient method of transport for some time to come.

EV's are nonsense. You already have greenies screaming to the heavens about disposal of hearing aid batteries and the like.
Where are they going to put all those spent car batteries?
EV's simply do not make sense. That's why our government is all for them. Think about it.. you have multiple conversions of energy forms that have to be transmitted through inefficient power lines to a battery that then transmits the energy to a motor.
It is idiotic and not cost effective.
That's why it will probably be pursued to the taxpayer's detriment, as was/is ethanol.

Jun 24 10:21 PM

[The Greates...:]

JeffDB
Lets try this from a different angle, if I have something that everyone in the world wants I am in a good position no doubt. Now lets start at the beginning, say around 1999, and close 26 refineries between 1999 and 2001 on the west coast alone. At that time frame crude was relatively dirt-cheap, now lets do some merging over the next 5-6 years in which we end up with 5 major oil firms. Even today, oil is pumped out of the ground in Saudi Arabia for around .25 a barrel, so it was real cheap in 1999. Then in 2001 Phil Graham re-writes the futures commodity legislation and opened the door for hedge funds and future buying in the speculated market in energy. Which led to the Enron mess, traders do not answer to anyone here in the US and purchase fees are cheap enough that the can purchase large shares in the crude oil market with out any intention of using the oil, just sit on the contract until the three month period is up and then sell at a profit if possible. No one can deny the huge net profits of these companies over the last 6 years or the balance sheet they are caring today. Not to mention the fact that all 5 of the major oil companies are currently buying their stocks back at record levels today. It is reminisce of the Hunt brothers and the corning of the silver market, ah, but they got caught. Energy companies are currently giving millions to the lobbyist in Congress right now to kill green energy programs. And they are giving so much that they will spend millions more this year then last year. (opensecrets.com)
A de-facto tax cut for American motorists. Each $1 per barrel drop in oil increases U.S. GDP by $100 billion per year and every 1 cent decline in gasoline increases U.S. consumer disposable income by $600 million per year.
The last 20 years have been characterized by rising U.S. oil consumption, but now the U.S. Energy Information Agency. incorporating the most-recent changes in U.S. consumer behavior, says there will be no appreciable growth in U.S. oil consumption between now and 2030, with biofuels accounting for all of the growth in liquid fuels. So, if you’re the average American family, working two jobs and commuting 30 miles both ways, the cost of a gallon of gas is very important to them. If this trend continues, there will be just two class of Americans, the have’s and the have nots. People with out working income become desperate, they lose their hope and their dreams. Not to mention the rising cost in utilities, food, or basically every single thing made, shipped, barter, sold or bought in America cost more when fuel goes up.
So, what benefits the whole world if oil costs go through the roof? It has already cause the current economic down turn, which will never turn around if the energy market continues to operate the way they have been allow to do. At some point there will be a depression of huge impact that the world may never recover from. I have enjoyed the banter, yet I still do not see how manipulation of this one commodity is a good thing for the rest of America.
Oh, and Peak Oil is still just a theory, remember the power of propaganda.

Jun 24 11:12 PM

[The Greates...:]

Further, the only reason the oil industry is paying tankers for storage is because they have their hands on the valves. It is a mathematical equations as to how long the current surplus will last. Also, they did not see the bottom falling out in Aug 08, and it did take them by supprise. They already had the oil out of the ground when the market went south. I am sure they will continue to cut back production until demand is artificially running ahead of the current supply.

Jun 24 11:29 PM

[The Greates...:]

For some good reading on this subject check out this site.
Global Research.
www.globalresearch.ca/...

Jun 24 11:30 PM

[JeffDB:]

On Jun 24 10:21 PM blu wrote:

> davew,

> EV's are nonsense. You already have greenies screaming to the heavens
> about disposal of hearing aid batteries and the like.
> Where are they going to put all those spent car batteries?

That doesn't seem to be as big a problem as many may think. According to the Tesla website:

"Unlike other batteries that came before them, Lithium ion batteries are classified by the federal government as non-hazardous waste and are safe for disposal in the normal municipal waste stream. However, dumping these batteries in the trash would be throwing money away. Even a completely dead battery pack contains valuable, recoverable materials that can be sold back to recycling companies for cash.

But reuse is such a key part of our philosophy, we're doing our best to arrange to have our car batteries safely recycled — even before we've sold our first car. Our goal is to include the cost of recycling in the purchase price of each car. " (1)

> EV's simply do not make sense. That's why our government is all
> for them.

It seems that I am opposed to practically every policy of our government leaders, in many cases quite vehemently so, but from what I can tell EVs & PHEVs look like they are pretty practical for some people for some purposes. I think they could certainly use some further development, particularly in bringing costs down, but hopefully they will continue to be improved just as internal combustion engines have improved over time.

Perhaps our government shouldn't be trying to subsidize them or push them to the exclusion of other alternatives, but that is a separate issue altogether.

> Think about it.. you have multiple conversions of energy
> forms that have to be transmitted through inefficient power lines
> to a battery that then transmits the energy to a motor.
> It is idiotic and not cost effective.

Actually, from what I've read, it is actually more efficient to push electrons through power lines vs hauling gasoline or diesel to corner stations around the country and pumping it into individual engines to produce the energy. I'll let the engineers argue about that, but from my standpoint the proof is in the cost of fuel per mile driven.

From the stats I've seen on individual passenger vehicles, it looks like the cost of the electricity is about 2 cents per mile in most areas. In the St. Louis area where I live it was a little less than that. Of course that doesn't include road taxes, but I think the average is about 2 cents per mile for typical gas vehicles in most areas. Added together, that 4 cents per mile would cost about $4 to go 100 miles for an electric vehicle.

For a gas vehicle to compare it would need to get 50 miles per gallon if gas was $2.00 per gallon, at $3/gal it would need to get 75 mpg and at $4/gal it would have to get 100 mpg, of course.

Given that oil prices were rising some 25% year over year from 2004 through 2008 at which point they skyrocketed before the economy finally crashed, it would seem that high gas prices are likely here to stay with a significant likelihood of continuing to rise faster than the inflation rate. If so that would make electric vehicles even more cost competitive.

Add to that a number of other advantages. Electricity can be generated from virtually any energy source, whether that be gas, diesel, coal, natural gas, nuclear, wind, hydro, geothermal or solar. That gives tremendous flexibility in switching between fuels depending upon current market conditions. It also would be a tremendous help in reducing our trade deficit as those tens of billions of $ would not need to be shipped overseas every day if we used locally produced fuel, and we have abundant supplies of many of those on the above list. We could become energy independent and no longer held hostage by countries who hate us or want to use the money we give them to attack us.

Felix Salmon posted an article yesterday about a nuclear power plant made by General Electric "could be profitable selling energy at just 5 cents per KwH" (2) If those types of newer designs in nuclear plants could be brought online that could cut the fuel costs of electric vehicles in half again.

> That's why it will probably be pursued to the taxpayer's detriment,
> as was/is ethanol.

I certainly agree with you that ethanol was and is a big scam and waste of taxpayer dollars - at best. I am also a believer in letting the market decide which technologies are best rather than have the government try to pick winners, but despite our government's shortcomings, and even shortcomings of electric vehicles, I think they still may have quite a bit to offer us in their own right.

endnotes:

1. Tesla Motors; Charging and Batteries
www.teslamotors.com/ef...

2. Nuclear Power: Going Fast
seekingalpha.com/artic...

Jun 25 12:24 AM

[Ivan Kitov:]

JeffDB,

As a physicist, I should say that any physical law, even so-called fundamental ones, has its start and end. Nothing is infinite. So, you are right that the empirical relation we have reported will fail at some point, as it had not been working in the past. This is not to deny the existence of the relation here and now. One just has to observe and detect relevant "structural break".
But, imagine that a new linear sustainable trend is emerging right now and will exists during the next five to ten years. Will it change the oil market behavior? Will it change investors behavor? And so on.
Sincerely, if you would know the trend between 2002 and 2008 in 2003, would you buy some more XOM, COP or DVN?
Some people did buy.

Jun 25 02:41 AM

[Ivan Kitov:]

MAR,
I do not deny any possible mechanism behind the linear trends. Moreover, I would refrain commenting on any of them because this is beyond my quantitative empirical relation. But the realtion will be broken at some point in the future. This is inevitable. Let's wait, but before it fails it works, and one could use it for various purposes.


On Jun 24 09:59 PM Mayer Amschel Rothschild wrote:

> Ivan,
> I suppose what I'm saying is that, when the banking system and economy
> function normally, core CPI and headline CPI will be very closely
> related. However, since core CPI measures finished goods and oil
> is a crude good, I believe that core CPI follows trends that fuel
> costs do since fuel costs affect every level of production and distribution,
> thus resulting in the correlation that your graphs show. When global
> credit markets, crude good prices, and the dollar all start behaving
> differently and more erratically than they have for the past 70 years,
> it seems to me that this correlation will break down.
> However, I'd like to say that I appreciate how thorough and straightforward
> your article is.
>
> On Jun 24 03:22 PM Ivan Kitov wrote:

Jun 25 02:46 AM

[Davewmart:]

Ev's do around 4 miles per kilowatt hour - the info is available in lots of places, for instance the Chevy Volt site.
That means you use 25kwh for every hundred miles travelled.
At $0.15kwh that works out to $3.75 for 100 miles.
The reason that it is so cheap is that electric motors are around 4 times as efficient as ICE.
As for disposal of batteries, they can be recycled - in fact, you would not be able to sell cars in Europe using electric technology if they were not recyclable, as you have to demonstrate before you start selling how you are going to do it.
en.kioskea.net/actuali...

Jun 25 06:30 AM

[Mayer Amsch...:]

Upon further inspection, I see that this guy is a Russian geologist. I think he's a mole that the Soviets sent to influence the price of oil upwards!

Sigh. I miss the cold war. Everything was nice and easy, you could blame the Russians for any and all problems.

Jun 25 10:02 AM

[Ivan Kitov:]

It is only the mother nature who might try to send me ...


On Jun 25 10:02 AM Mayer Amschel Rothschild wrote:

> Upon further inspection, I see that this guy is a Russian geologist.
> I think he's a mole that the Soviets sent to influence the price
> of oil upwards!
>
> Sigh. I miss the cold war. Everything was nice and easy, you could
> blame the Russians for any and all problems.

Jun 25 10:20 AM

[diogeron:]

The government has always picked "winners and losers" in the sense that they subsidize some things and not others. For example, as one who worked with the nuclear power industry for 30 years, it is clear that we never would have had a commercial nuclear power industry in the United States without the massive government subsidies that helped the transition to commercial nuclear power plants. I'm not saying that was a bad thing, but to pretend that the "free market" developed the nuclear power industry on it's own is simply a myth. We've also had tax policies in recent years which favor Big Oil. Those are policy questions that elected officials make, often in conjunction with businesses and they have an effect of disincenting some technologies and behaviors "in the market" and not others. There may be legitimate criticisms of the push to develop alternative energies, like wind and solar, but the idea that the government has stayed out these issues in the past is simply wrong.

Jun 25 03:27 PM

[JTurner:]

One mention of clean safe nuclear power by Obama and Steven Chu and oil will drop. It works well in France and new safe nuclear tech has just arrived. By the way it's the power grid, not the cars, that's the real oil guzzler.

Jun 26 01:14 AM

[JTurner:]

"The political will may be there soon, said Steve Williams in the Victoryville, Calif., Daily Press. Energy Secretary Stephen Chu “has made nuclear power an agency priority,” and the Obama administration just approved $18.5 billion in funding to start reviving the U.S. nuclear industry. Taxpayers, consumers, and even environmentalists should welcome this “vast about-face” in energy policy."

Ah, but some new reactors, such as GE’s PRISM plants, are actually designed to run on old nuclear waste, said Felix Salmon in Reuters, and they’d be affordable and “super-safe,” shutting down instead of melting down if there’s a problem. They can also be retrofitted into coal plants. What's missing is “political will,” and billions of dollars for testing and approval."



www.theweek.com/articl...

Jun 26 01:17 AM