Oil Metrics Indicate 70% Consumer Goods Inflation, UGA Will Ratchet Higher

Jun. 08, 2022 2:55 AM ETUGA2 Comments
Bill James profile picture
Bill James
198 Followers

Summary

  • The 70% increase in oil between June 2021 and June 2022 will likely force 70% inflation in consumer goods by June 2023.
  • With $3.50 gas, CNBC reported: Missing $4,155? It Went Into Your Gas Tank This Year.
  • The Federal goverment is repeating their policy mistake of 2008 as documented by the Dallas Fed.
  • UGA at $80, and gasoline at $4.81 will continue to ratchet higher until demand is cut by crisis or rationing.
Money in the chute of a gas representing high gas prices

twity1/E+ via Getty Images

The Law of Supply and Demand will force inflation of consumer goods by roughly 70% in 2023:

  • Life requires energy.
  • Energy is the Prime Resource.
  • Oil prices: 70% increase in oil prices from $70 in June 2021 to $119 in June 2022. This increase affects consumer goods produced in the 2023 yearly food cycle.
  • The US cannot increase its supply of oil without a Rig Count of 1,500 and 3 years lead time.

Following are metrics. I am very interested in criticism and feedback on where these metrics might be wrong or improved.

At the end of this are policy and investment recommendations.

A 50% US oil demand cut is practical and necessary to contain inflation

In 1970, per capita oil use was nearly identical in the US, Sweden, and Denmark. In response to US Peak Oil in 1970 and the 1973 Oil Embargo, Sweden and Denmark adjusted policies to reduce per capita oil demand by ~60%. In contrast, US policies used the dollar’s reserve currency status and the US military to secure foreign oil to borrow and buy foreign oil. It will be hard, but in 4 years the US can cut oil demand by 50%. Choosing to cut demand will be less harsh than demand cuts forced by hyperinflation.

Per capital energy

Federal forecasts are repeating their 2008 failure

In 2021, Secretary Yellen, stated that inflation is a “small risk.” The Dallas Federal Reserve reported on similar judgment errors in 2008:

Dallas Fed review of EIA judgment

Oil Supply is determined by Rig Count and DUCs

The Fracking Boom was created as oil companies invested $350 billion to deploy 1,500+ rigs for 3-4 years to increase supply to 13 million barrels per day by 2019.

EIA data on Rig Count

With a large number of oil company bankruptcies in 2020, it appears they are no longer able to deploy rigs as they previously did to follow rising oil prices. This indicates decreasing future oil supply.

EIA data on Rig Count and Oil Price

It seems the only increase in the oil supply is coming from DUCs, “Drilled UnCompleted” wells. Once the DUCs are brought into production, it seems likely supply will decrease with a Rig Count of 727.

EIA data on DUCs

Oil Inventories are critically low

In July 2008, I wrote a Seeking Alpha article on inventory risks that are repeating today. If drivers fear an outage they shift to from mostly empty to mostly full. This pulls about 32 million barrels out of available supply. This fear hit the US Southeast in September 2008 with gas lines.

The 2022 hurricane season forecast is for an above-average storm count. Anything that causes drivers to fear, can cause supply outages at any time with current inventories. NOTE: EIA count as "inventory" resources required to fill the supply chain. This is one of the defects of EIA reporting.

Inventory Risks EIA data

Federal Highways are unconstitutional

The Boston Tea Party was a demonstration against the general government’s transportation monopoly that triggered a war. To prevent rebuilding that path to war:

  • Sept 14, 1787, the Constitutional Convention voted 8 states to 3 to enumerate the maximum extent to which the Federal government could tax to build highways and other “internal improvements” to “post Roads.” Further, “No Preference” was to be given to the commercial infrastructure of one state over another.
  • Core objective of the Constitution was to create a paradox of securing Liberty within the coercion of the Rule of Law:
    • To minimize violence from war, the Federal government was granted unlimited taxing powers to “provide for the common defence”
    • To prevent mixing war powers with commercial self-interests, the Federal government was restricted to only “promote the general welfare.” The “post Roads” clause enumerates a prohibition from taxing to provide welfare in the form of highways. We the People and states are sovereign over issues of welfare.
    • This Divided Sovereignty is the subject of Federalist #1-46 and addressed in still others. Three examples:
      • Federalist #28: “Power being almost always the rival of power, the general government will at all times stand ready to check the usurpations of the state governments, and these will have the same disposition towards the general government. The people, by throwing themselves into either scale, will infallibly make it preponderate. [[Note: We the People found it necessary to use these two types of government to wage war on the abuses of the other. We used state governments against the general government in the Revolution and the Federal government to wage war on states succeeding from our Union without Article 5 Amendment]]
      • Federalist #45: "The powers delegated by the proposed Constitution to the federal government are few and defined. Those which are to remain in the State governments are numerous and indefinite. The former will be exercised principally on external objects, as war, peace, negotiation, and foreign commerce; with which last the power of taxation will, for the most part, be connected. The powers reserved to the several States will extend to all the objects which, in the ordinary course of affairs, concern the lives, liberties, and properties of the people, and the internal order, improvement, and prosperity of the State."
      • Federalist #51: "Ambition Must be Made to Counter Ambition"
  • The Divided Sovereignty of the “post Roads” restriction was enforced by 21 Presidential veto messages.
Divided Sovereignty

Unintended consequences of violating the Constitution

The Federal-Aid Highway Act of 1916 began systematically violating the Constitution. Violations were massively expanded by The Federal-Aid Highway Act of 1956 (Interstates).

  • A similar unconstitutional Federal communications monopoly was established by Executive Order on Aug 1, 1918. Ending that monopoly in 1982 resulted with the Internet replacing rotary telephones.
  • Ending the current government transportation monopolies will allow liberty to digitizing mobility and energy.

Consequences of violating the Constitution via Federal highways.

  • It is the nature of governments to coerce compliance with law. Innovation is a compliance failure.
  • Americans have had the 25 mpg-efficiency of the Model-T for a century under Federal monopoly.
  • Since The Federal-Aid Highway Act of 1916, replaced infrastructure decision-making from free-market value to political influence, 46% of 400+ ton-mpg railroads have been replaced by 25 mpg roads.
  • US Peak Oil
    • In 1956 Dr. Hubbert documented US Peak Oil would be in 1970 (peak supply).
    • Admiral Rickover’s 1957 “Energy Slave” speech reinforced the need to treat oil as we would our children’s savings account.
    • Despite this clear data, the Interstate Highway system was built and created the crisis we face today.
    • US Peak Oil was in 1970.
    • With the decline in US Oil Supply, national debt was increased to buy foreign oil and wage oil-wars to secure that oil.
    • Pollution from burning oil to move 2 tons to move a person tilted the balance of nature into Climate Change.
    • With the Fracking bankruptcies, US oil supply is decreasing, forcing the current issue with inflation (decreasing supply with the same demand).
US government data on oil production, imports, debt with assessment

The inflation we face today is part of a 50-year trend since US Peak Oil in 1970. Decreasing supply with the same 25 mpg Model-T efficiency is forcing inflation. Recession is highly correlated with ratcheting higher oil prices.

For those who think it was better under the Trump Presidency, it was not. COVID cut US demand for oil by 45%. Without that demand cut, gas prices would have been $6 in 2020. The ability of the US to cope with 45% reduced oil consumption indicates we can adapt quickly if we rally.

Data on oil prices

With a delay of 12-18 months, unemployment is highly correlated with the ratcheting higher oil prices.

US government data on gas prices and unemployment

In July 2008, in collaboration with the Hubbert Institute, I briefed Senate and campaign staffs for Senator Obama and McCain. Bud McFarlane, former National Security Advisor, was the only one to see the risks, but he was unable to get it raised as a campaign issue. The following graphs were used to show how rising gas prices were forcing families to use mortgage payments to buy gas to keep their jobs.

Data used to explain risking foreclosures to Senate staffs

Below is the updated graph for Disposable Energy (how much energy people can buy with their take-home-pay). Disposable Energy began warning of the 2008 foreclose collapse in 1998. It is currently crashing and indicating a replay of 2008 within 18 months without mitigating actions.

Metric Disposable Energy

We are facing hardships we can overcome.

Without actions, demigods have typically used such hardships to gain power as warned by the Joint Forces Command in 2010, (forecast delayed by 10 years by the unexpected willingness of fracking investments to lose $350 billion) “One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest.” This seems already unfolding with Russia.

Policy Recommendations

  • US military immediately cut oil use by 50%. Lead by example. This is a national security threat as stated by 9 of the last 10 Presidents.
  • Cities and state immediately exercise sovereignty over issues of welfare. Do not wait for Federal actions. If there is a replay of 2008, you will face civil unrest in your communities.
  • Call on all citizens, schools, and other entities to plant Victory Gardens. Energy self-reliance starts with myself. If we all strive to grow 1/3rd of our own food, oil supply shocks will not become oil famine. Food requires energy.
  • Ration gasoline so working-class people have equal access to depleting supplies.
  • Convert 10% of car-lanes into bike-lanes.
  • Adopt the Solar Mobility Ordinance to restore free markets to innovate affordable transportation networks.
    • In 1972 President Nixon sent his daughter Tricia to open the Morgantown PRT, the world’s first grade-separated network of self-driving cars as part of the effort to address US Peak Oil and environmental issues.
    • There is no technical barrier to powering urban mobility within a solar budget. The barrier to cutting US oil consumption by 50% is documented in Congressional Study PB-244854 as government “institutional failures” that have blocked transportation innovation for "four to six decades (aside from some relatively minor cosmetic changes)". The study was published in 1975 to identify solutions to the hardships of the 1973 Oil Embargo.

Investment Recommendations

As free markets are restored, transportation and energy will digitizes just as communications did after free markets were restored in 1982.

  • Transportation:
  • Energy:
    • Oil will always be valuable, but it is like money in a savings account. If you extract it, its value goes away. So oil companies that minimize depletion rates and focus on the sale of high margin uses of oil will likely be durable sources of value.
    • The shift to solar-powered economies is essential to political stability.
  • Supply Chains:
    • Unstable oil prices will make unstable supply chains, so investments that localize supply chains for solar energy and electronics manufacturing will benefit and likely become economic lifeboats.
    • I located my company in Oklahoma because it has the fossil energy to power a transition to a solar-powered economy and sun/wind to sustain the transition.

This article was written by

Bill James profile picture
198 Followers
Bill received a BS in 1972 from West Point with concentrations in math, physics, chemistry, and engineering. He was an NCAA All American Wrestler and captain of the wrestling team. He is an eight-year infantry veteran, Airborne, Ranger, Arctic Light and Mechanized Infantry in the United States Army. His industrial experience started in 1980 with working for Honeywell for six years setting up manufacturing capabilities around the US and Europe. In 1986 he founded Applied Statistics to develop and sell the software, electronics, and tools to implement Statistical Process Controls for manufacturing processes. In 1989, he founded JITCorp to create the software to clarify and proactively manage the selling process. JITCorp’s principal products are WebClerk and CommerceExpert. In 1998 he began working on the patent for applying distributed collaborative computer networks to improving the mobility process (6,810,817). JPods LLC was founded to implement the re-tooling of transportation in the niche of highly repetitive, commuter range transport of people and cargo with payloads less than 1200 pounds. Bill is the author of Desktop Hosting, A Developer’s Guide to Unattended Communications (http://search.barnesandnoble.com/Desktop-Hosting/Bill-James/e/9780471207672&prid=9780471207672&lkid=J15005220&pubid=K17117) (Wiley), which outlines technology and concepts for networking the supply matrix. He holds Patent 6,810,817, Intelligent Transport, which applies distributed collaborative computer networks to moving physical packets, a Physical-Internet™. Bill is married with grown children and is a runner.

Disclosure: I/we have a beneficial long position in the shares of JPODS LLC either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am the founder of JPods LLC and the patent holder for the invention of solar-powered mobility networks. These networks will benefit as they replace oil-powered urban transportation networks.

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