California: Leveraged to Gasoline Prices and Nearing the Breaking Point

| About: The United (USO)

Stennet Rowe - Freeway Stanchion and Makeshift Dwellings, Central Valley California.California has over 36 million residents. But 60% of the state’s population, over 22 million people, live in the five big counties of the south: Los Angeles, Riverside, San Bernardino, Orange, and San Diego. Given that California (just like the US) has nearly as many vehicles on the road as people, this means that Southern California not only contains roughly 7.00% of the US population, but also 7.00% of our nation’s vehicles. For a region built originally for car commuting between vast tracts of single family homes, 100 dollar oil in 2008 was quite painful. However, as we head towards 80 dollar oil here in 2009 we should consider the economic situation is more fragile than one year ago. And thus, California’s breaking point from high gasoline will now come more quickly.

At this week’s ASPO conference in Denver there was a convergence of thinking that when oil rises above 4.00% of GDP, the US economy starts to falter. An additional problem is that new oil really needs global prices above 70.00, on average, to make it worthwhile to pursue. As one analyst out of New York put it:

Houston needs 70.00 to create new supply, but the US economy is vulnerable once we get above 80.

To these remarks I would simply add that compared to last year, GDP is lower, unemployment is of course higher, and here we are knocking on 80 dollar oil. Additionally, California is not the only region that is leveraged hard, to gasoline prices. Florida, Texas, and the mid-Atlantic states are also quite vulnerable. But among all these, California’s unemployment rate has now taken the lead. One wonders how the next move upward in gasoline prices will translate to the public mood, and the fortunes of current politicians.

In a number of posts the past few months, I have suggested that once California reaches 15% unemployment at a time of 100 dollar oil, the American public will finally understand that we are in an inflationary depression. While the combination of these conditions may have seemed unlikely just six months ago, it’s worth considering that for every reasonable objection one might make to such an outcome–the confluence of high unemployment and high petrol prices can also come about in a mutually supportive progression. We might think of the process as a ratchet, building its way to a hard-won conclusion.

Topanga Canyon 1930sWe are much closer to that conclusion now, than many assume. Oil at 80.00 is an easy lay-up to 100.00. Just recall for example the action in oil from the Fall of 2007 to June of 2008. There was a brief lingering at 90.00 in mid Winter, and then 100 was easily overtaken. Additionally, while California currently suffers 12.2% unemployment using the conservative, headline measure, that state is already at 17.7% using the broader and more accurate U-6 figure. Only Oregon and then Michigan, which most regard as being in a classic depression already, have a higher U-6 unemployment rate, above 18% and 19% respectively. So let me ask, which is more dangerous: 2008’s average 100 dollar oil (with the several month spike towards 150) flowing over California last year, when its U-6 unemployment averaged 13.4%, or, the current 80.00 dollar oil (with a threat to go higher) over 17.7% U-6 unemployment?

Last night I used an easily searchable public website to search gasoline prices in California. I found that I could get fairly close to many of the gas stations I used often, during my days in the Golden State. At Fairfax and Sunset, the 76 station is offering petrol at $3.09. Closer to the ocean (a last stop on my way to Topanga), I see that gas is over $3.15 in Santa Monica. Given that yesterday’s weekly oil report from EIA, which showed a massive drop in gasoline inventories, sparked a big rally in both oil and products on the US exchanges, I’ll venture those petrol prices are even higher tonight.

Photo: Rennet Stowe: Freeway Pillar and Dwellings, Central Valley California. | Topanga Canyon, 1930’s