Why Do Oil Prices Keep Rising? 23 comments
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Inflationistas are crowing over the price of crude hitting $113 a barrel and the MarchProducer Price Index as well.
Indeed the PPI soared last month, primarily on account of energy and food.
Before
seasonal adjustment, the Producer Price Index for Finished Goods
climbed 1.9 percent in March to 175.4 (1982 = 100). From March 2007 to
March 2008, finished goods prices rose 6.9 percent. Over the same
period, the index for finished energy goods increased 20.4 percent,
prices for finished consumer foods moved up 5.8 percent, and the index
for finished goods less foods and energy advanced 2.7 percent.
Gasoline and diesel prices are soaring as well.
Gasoline Prices 2008-04-14
click on chart for sharper image
Chart courtesy of the Department of Energy.
Gasoline
prices are about 6 cents higher than last week, and 51 cents higher
than a year ago. Diesel prices are 10 cents higher than last week and
$1.18 higher than a year ago.
Higher diesel prices we behind a
proposal by independent truckers to participate in a "National
Shut-Down" on April 1. I wrote about Trucker Dan's proposed strike on
March 24, in Open Letter To All Truckers. The shutdown was a big flop as I expected.
Other than isolated incidents of truckers deliberately driving slow and blocking traffic
nothing happened. Is blocking traffic on freeways supposed to win
sympathy? In the end, truckers had loads to deliver and they delivered
them. If they failed to do so, it might be the last load they would
get. Who wants to do business with an unreliable trucker?
Gasoline Consumption Declines
In a sign of economic stress, gasoline usage is declining. This Week In Petroleum is asking Where Have All the Drivers Gone?
Does it seem like there are fewer cars on the highway this year? The recent trend in motor gasoline consumption would appear to indicate so. Gasoline consumption has been declining for at least six months. Households may be thinking twice about jumping in the family car as a slowing economy and rising prices are stressing pocketbooks from Maine to Hawaii.Inquiring minds might be asking: If U.S. consumption is down why are prices rising? Here are the answers.
During the first half of 2007, motor gasoline consumption was up by 0.9 percent compared with the same period the previous year. But, during the second half of 2007, gasoline consumption declined by 0.1 percent from the year before. In fact, fourth-quarter consumption fell by 0.4 percent. The drop in gasoline consumption, the first since the recession of 2000, should come as no surprise with the slowing economy and soaring gasoline prices. The first quarter of 2008 continued to show an even sharper decline in consumption of 0.6 percent compared to the same period in 2007.
- The dollar is falling
- Global demand is still rising
- Peak Oil
- Speculation
The latest peak oil news shows Russian Oil Slump Stirs Supply Jitters.
Russian oil production, for years a vital source of new supplies for world markets, is showing signs of a slump, adding to uncertainties that have helped push oil prices to record highs.Problems On Our Doorstep
Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.
Declining production from the world's largest oil producer and one of its largest exporters puts further pressures on an already strained market and adds to the potential for higher prices for a global economy coping with a slowdown.
The economic downturn in the U.S., by far the world's largest oil consumer, has taken some steam out of oil demand. But fast-growing Asia and other places are still adding to demand, and many analysts worry that a global supply pinch later this year could send prices higher.
The oil fields in Saudi Arabia are in decline. So is the second largest oil field in the world, Cantarell, in Mexico. One year ago, Rigzone reported Mexico Tries To Save Big, Fading Oil Field.
Cantarell, which currently produces one of every 50 barrels of oil on the world market, is fading so fast analysts believe Mexico may become an oil importer in eight years. That would batter Mexico's economy, which depends on oil exports to fund 40% of its government spending.Supply Demand Issues Do Not Constitute Inflation
Benjamin Melo, manager of the Akal C platform, tries to assess the future by looking out across the field: "This has been a generous field. And there is still a lot of oil down there. But it won't last forever."
This is a simple supply demand issue. Supply drops, demand rises, prices rise. And this has nothing to do with inflation. Someone who gets it is "Genesis" on the Market Ticker Forum.
On the one hand we have their house price collapsing back to intrinsic value (which must happen) and at the same time we have the "bubble kids" shifting their bets into the commodity market fueling insane PPI and CPI increases, which means you're paying more for everything you need to survive, from food and fuel to copper pipe for that house you'd like to build.Treasury Bubble?
And since fuel is in literally everything, there is no escape. Oil is a primary component in plastics, for example. Go walk around your house and tell me how much of what you have in that home would not be there were it not for some form of plastic!
In addition oil is food. The obvious part, of course, is the transportation of the food to your local store, but it doesn't stop there. Natural gas is the primary component in fertilizer (ammonia) and of course tractors need diesel fuel to operate.
There are some who claim that this is a matter of "inflation."
If you define "inflation" as "price change", yes. But that's not the true definition of inflation - inflation is first and always a monetary phenomenon. Unfortunately the bad news is that because this is not being caused by monetary inflation there is no monetary solution.
Peak Oil is not a monetary phenomenon so all this ranting we hear about bubbles in treasuries based on oil and food prices is misplaced. The Fed is not printing so that inflationary claim can be tossed out the window.
Swapping is not printing, although it could cause printing down the road. See Fed's Swap-O-Rama Gets Crazier and Fed Is Not King Midas for more about what the Fed is doing and still others want the Fed to do.
In the meantime, writeoffs are continuing at a staggering pace. More writeoffs are coming still. There will bank failures. The Fed is even gearing up for them. Commercial real estate is poised to plunge. There are Record Home Price Drop In Southern California. Walking away will be The Next Mortgage Crisis.
And there is an entire wave of foreclosures coming because Lenders Swamped By Foreclosures Let Homeowners Stay.
Banks are so overwhelmed by the U.S. housing crisis they've started to look the other way when homeowners stop paying their mortgages. Lenders who allow owners to stay in their homes are distorting the record foreclosure rate and delaying the worst of the housing decline, said Mark Zandi, chief economist at Moody's Economy.com, a unit of New York-based Moody's Corp. These borrowers will eventually push the number of delinquencies even higher and send more homes onto an already glutted market.Think that's marked to market?
"Some people stay in their houses until someone comes to kick them out," said Angel Gutierrez, owner of Dallas-based Metro Lending, which buys distressed mortgage debt. "Sometimes no one comes to kick them out."
There is not a thing above that is remotely inflationary. I am sticking with what I said in Now Presenting: Deflation!
It's time to stop pretending. Deflation is here and it is now. Anyone who sees stagflation or inflation out of what's happening now is missing the boat.
People point to rising M3 or MZM. But they fail to note that the biggest rise in M3 is institutional money market funds. Why are those rising? Because businesses are tapping credit lines while they still can and parking it in money markets. Is this inflationary? Hardly. Those who propose it is show a lack of understanding about what is really happening.
What about bank credit? Supposedly bank credit is still rising. At least that's what the chart shows. But marked to market is bank credit really rising? No chance.
Is Peak Oil Causing Inflation?
The answer is clearly no. Peak oil can never cause inflation in and of itself. Inflation is an increase in money supply and credit. Peak oil cannot cause that to happen. Rising oil prices in general, for any reason cannot cause inflation either. However, rising oil prices could be a result of inflation. But given that the U.S. is in deflation right here right now, the recent rise in oil prices cannot be attributed to inflation, at least in the U.S.
Rising oil prices can be attributed to rising inflation in China, rising worldwide demand, and peak oil. That is a nasty brew and there is no way for the Fed or the ECB to control it.
Suppose oil production in a large Saudi Arabia oil field halted tomorrow. Oil just ran out unexpectedly and oil surged to $300. Would the correct response be to hike interest rates to combat inflation?
The idea of course is preposterous. Every central bank in the world would be rapidly cutting rates because economic activity would drop off a cliff. Instead of shutting down that oil field overnight, imagine it shuts down over time. Just like is happening. Oil prices rise. Is the response from central bankers supposed to be to keep hiking?
That simple example should show why setting interest rate policy based on the price of oil is absurd. However, central bankers are certainly guilty of spawning bubble blowing policies that have led to the mess we are in.
And as I said in the Fed Uncertainty Principle "I don't know, you don't know, and the Fed does not know what to do. This is part of the "Fed Uncertainty Principle" and a key reason why the Fed should be abolished."
Perhaps there is a bubble of some sort in bonds, but if so, the price of oil sure does not prove it. Only by getting rid of the Fed and checking the resultant answer would one know for sure.
Why Is Gold Rising?
People keep asking me why gold is going up. The answer is that it should be going up. Money (and gold is money), tends to increase in value in deflationary times. It doesn't have to but it tends to. So why, isn't the dollar going up? Because it is not backed by gold. Credit is being repudiated and there is a flight to real money (gold), and other hard assets.
Can there be another leg down in gold? Of course. Deflation is likely to remove leverage everywhere, and that includes hedge funds and other speculators hiding out in commodities and gold. The only unknown is from what level that happens. It could happen now, or it could happen from a higher level. I am open to either possibility.
A Weak Dollar Is Masking Deflation!
Right now what we have is deflation with a weak dollar. That weak dollar, in conjunction with peak oil, has caught nearly everyone off guard to the point they are screaming about oil prices and bond bubbles, while missing the far more important deflationary forces of foreclosures, bankruptcies, and massive writedowns in credit.
The combination of a weak dollar, peak oil, job losses, falling home prices, walk aways, and global wage arbitrage is the checkmate scenario for the Fed. Bernanke will find it impossible to inflate out of this mess.
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Keep up the good work. H
Refining capacity Peaked at 95% two years ago and is now close to 80%. The sour/heavy grades are in abundance but it will take years and a declaration of a national emergency to increase refining capacity to process the heavier grades...A Green Light without restrictions must be done now to start building them.
Personally, I did not believe I would see $200 oil before 2012 but now that prospect has a 50/50 chance of occurring in 2009...Watch the refining capacity numbers closely.
Even if massive approval for exploration and refining started today it would take at least 5 to 8 years to get through the processes required now and start the oil flowing. In the meantime you have the emerging markets growing at lightning speed with the flattening of the earth taking place via the internet.
So while we sit and wring our hands fretting about $4 per gallon gas; don't worry, Europe is already paying $7 to $8 per gallon. Needless to say you won't see many Hummers or Escalades in Europe.
You can hate XOM if you like but I prefer to own it and smile everytime I fill up the suv.
Diclosures- Long XOM
Not until we get over climate change hysteria. It may take a little load shedding in the present to nullify the concerns of a few degrees warmer a generation or two in the future. Only when Americans see that the choice is between actual prosperity or feel good environmentalism will we be able to build power plants, transmission lines and refineries.
Too bad we couldn't find a presidential candidate that would stand up to the crazies. Sigh.
Disclosure: Long STO, a money pipeline from middle American fools to my bank accounts.
Might work in a small "high density" European type country. Not in the US with the long distances we must travel. Unless your proposing controlling freedom of movement too.
Smoke and mirrors does not work in this situation. If the Fed had permitted homeowners to lose their homes, leading to a wholesaling of the overpriced housing stock, the rest of us who own homes would at worst, likely just find that our home value "clock" is reset back about five years. Not really a problem unless you have to sell a home you bought within the past five years, or if you were foolish enough to succumb to the banks' hype of home equity loans to buy that new boat or vacation a couple of years ago.
Secondly, if the Fed had just permitted Bear Stearns to go under, and the other "investment bankers" (talk about a new oxymoron) to simply see their share prices drop to reflect their real worth,again this would in the long run temper the rise in commodity prices.
You can get technical all you want about what is truly "inflation". Most of us know it when we see it.The smoke and mirrors tricks indicate to the world that there is no fixed (ie.gold) backing of the currency. Credit lines, swaps, etc. are created out of thin air, when all of us can see plainly that the excessive value of homes has evaporated, and any attempts to mask the pain must by definition cheapen the dollar.
Unlike a dollar, it actually takes resources and human capital to find, extract, and purify oil, gold, copper,grow wheat, etc..That is reality.
And so when we see these fancy attempts to stop a market reaction to the home credit mess, the market is not fooled.
We do have inflation. Real assets are going up in nominal dollar price, yet relative to gold not so much. Oh, houses, you say that there is deflation?
Not really, it is a matter of semantics. Housing prices were massively inflationary the past few years due to the liberal credit.
The fact that their prices are ratcheting back in the face of higher commodity prices does not reflect a deflationary situation for the economy,because the government is interfering with allowing them to fall to where they should be.
So the result is that the consequences are seen more in commodities instead of the houses.
Instead of the banks and the homeowners paying the price, we all end up paying in our purchase of eggs, bread, oil, etc..
There is no free lunch.
Monetary is increasing the money supply, which doesn't have to cause any particular price to go up. Price inflation is when there's a shortage of something that people are willing to pay up for, which doesn't have to come out of any increase in money supply. You can have one without the other in any particular area of the markets.
So, with commodities, with or without practical use shortages, there is price deflation in homes, price inflation in soybeans, price deflation in hedge funds, price inflation in rice, price deflation in anything that smacks of packaged debt, and price inflation in anything that smacks of practical use. The markets are a zero sum game - every dollar you gain over and above the index's performance comes from an underperformer's pocket. So deflation/inflation is always going on no matter the supply of money it's being done with.
There is always a wandering herd of investment money out there (made bigger and more energetic by increasing money supply) moving in and out of various areas. So instead of trying to figure out inflation or deflation per se, I just try to see where the wandering herd is leaving and where it is going. We have a major cycle now of the herd wandering away from financial assets and into hard assets. You can plainly see this on a historical chart, a cycle that runs every 15 years or so.
Two things particularly hit home for me:
"Suppose oil production in a large Saudi Arabia oil field halted tomorrow. Oil just ran out unexpectedly and oil surged to $300. Would the correct response be to hike interest rates to combat inflation?"
1st in the article itself mentioning the ECB´s reaction to the hike in prices, using the bluntest tool in the box (although the only one they really have). The same mistake was made by the British Conservative government in the 80´s and early 90´s to control spending, when fiscal policy would have had a much quicker, more direct impact. Having devasting recessionary impacts.
I am currently in southern Spain, there is 20% unemployment rate due to structural barriers to employment. The economy needs labour market reform and stimulation, not stalling! The high interest rates are maintaining a high euro, damaging exports, devastating the housing market, and to what benefit?
The other thing is:
Those who seem to think that Climate Change isnt a problem. Err maybe the 6 years Australian drought (amongst others), causing rice crop failures, and, price rises in commodities might just be caused by a changing climate?? As was predicted by a Malthusian friend of mine about 10 years ago, and according to him, it's going to get worse..
any real economic support/criticism would be appreciated on these two points
Yours
A Climate Change "crazy"
On 2008 Apr 30 06:08 AM Rusty Crazy wrote:
> I have a background in Economics.. which i must admit is very rusty..
> however I have got interested in this debate, as, working in sustainable
> fuels, I am looking for some counter-arguments to the "biofuels are
> evil" lobby. That there may actually be other causes to the current
> rises in commodity prices, hard though it may be to believe.
>
> Two things particularly hit home for me:
>
> "Suppose oil production in a large Saudi Arabia oil field halted
> tomorrow. Oil just ran out unexpectedly and oil surged to $300. Would
> the correct response be to hike interest rates to combat inflation?"
>
>
> 1st in the article itself mentioning the ECB´s reaction to the hike
> in prices, using the bluntest tool in the box (although the only
> one they really have). The same mistake was made by the British Conservative
> government in the 80´s and early 90´s to control spending, when fiscal
> policy would have had a much quicker, more direct impact. Having
> devasting recessionary impacts.
>
> I am currently in southern Spain, there is 20% unemployment rate
> due to structural barriers to employment. The economy needs labour
> market reform and stimulation, not stalling! The high interest rates
> are maintaining a high euro, damaging exports, devastating the housing
> market, and to what benefit?
>
> The other thing is:
>
> Those who seem to think that Climate Change isnt a problem. Err maybe
> the 6 years Australian drought (amongst others), causing rice crop
> failures, and, price rises in commodities might just be caused by
> a changing climate?? As was predicted by a Malthusian friend of mine
> about 10 years ago, and according to him, it's going to get worse..
>
>
> any real economic support/criticism would be appreciated on these
> two points
>
> Yours
>
> A Climate Change "crazy"
Hey Crazy Rusty...how is that Cap and Trade legislation working out for you and Spain? In reality Rusty, you should blame your own government for implementing that horrible legislation, because for every one "green" job created there, your country actually lost 2 jobs that went to other countries. And that's all because of the lies the environmentalists have shoved down our throats for years now. The earth's temp has actually decreased over the last few years, and not risen according to climate experts across the entire world. Even the U.S. EPA released a report in 2009 saying the same thing. Until enough people around the world actually fact check people like Al Gore and realize he's lying to put hundreds of millions of dollars of profit in his greedy pocket, nothing will change. Thank goodness a British high court has already ruled that his movie had at least 9 falsehoods, and they said that his movie had to have a disclaimer saying that it is not a documentary, but rather a political film if it was to be shown to British school children from now on. There were actually about 30 lies/falsehoods, and not 9 in his inconvenient little political movie that was supposed to be a documentary.