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Catching Up on Old Stories

It’s the end of the month, and the end of a holiday week. What better time to catch up on a few old stories with new updates?

Demand for oil didn't rise as fast as expected, so supply got ahead of it.

Demand for oil didn’t rise as fast as expected, so supply got ahead of it.

Oil prices are edging up ever so slightly, but gasoline pump prices have headed back up to $2.50 per gallon here in Minnesota. It’s still down a solid buck over last year, but what caused the increase? As noted here before, the calculated price for gasoline used to be ( WTI / 42 ) + 1.00, which is to say the price of West Texas Intermediate in $/bbl divided by 42 bbl/gal and add a buck for refining, distribution, taxes, and retail.

That should give us a pump price of $2.30 per gallon with WTI coming in at a paltry 55 $/bbl, but it’s generally about 20 cents a gallon higher. What happened?

The price of West Texas Intermediate (WTI) over the last two years.  It isn't going up nearly as quickly as gasoline at the pump.

The price of West Texas Intermediate (WTI) over the last two years. It isn’t going up nearly as quickly as gasoline at the pump.

It turns out that refiners are making a lot more money now, passing along a higher profit to consumers … well, because they can. The “crack spread” or net difference in refined oil versus crude is up about 33% in the Midwest, from $7.50 per barrel ($0.18) last year to $10.00 ($0.24) this year. That doesn’t account for all the rise, so we can expect that retailers are making out better, too.

It’s whatever the market will bear.

Once they stop drilling new wells, the price can only go up.

Once they stop drilling new wells, the price can only go up.

Speaking of free markets in oil, there clearly isn’t one. Back at the end of last summer when the price of oil was declining, many speculated that Saudi Arabia was deliberately not cutting their production for the sole purpose of driving out US producers and retaining market share. Apparently, that’s been confirmed now.

“There is no doubt about it, the price fall of the last several months has deterred investors away from expensive oil including US shale, deep offshore and heavy oils,” according to an unnamed Saudi official quoted in the Financial Times. It’s not normally good to rely on an unnamed source, but it was pretty obvious what was going on all the time.

Look for oil prices to edge up slowly over the summer as US producers get out of the game.

Better than cheese, at least to the investment savvy mouse.

Better than cheese, at least to the investment savvy mouse.

Speaking of games, we’ve speculated recently as to why the price of a very likely hike in the Fed Funds Rate was being completely discounted by the markets. The reason appears to be a very simple one. In this era of great economic change, one thing has been true for seven years now – the Fed Fund Rate has been pegged at zero. During this time the high turnover among traders has taken its toll, and a solid third of Wall Street has only been on the job during this regime.

This confirms a theory long held by Barataria that business cycles happen largely because of fads in business and investing, which is to say that everything goes straight to Hell once grandpa retires and the young kids think they know better. That may even apply when it comes to listening to the balding guy at the desk next to you when he says, “Don’t fight the Fed”.

If this is really the case, when the Fed Funds Rate creeps up a quarter point this summer the result may be cataclysmic. The old adage, “Sell in May and stay away” may be much more true in 2015 than it was in recent years during the big rise off of the 2008 lows.

Not everyone can do this.

Not everyone can do this.

The last story worth looking into is a bit harder to digest. The “liquidity trap” that we are in is based on very low interest rates accompanied by a high level of savings – liquid cash that can’t find a good investment and becomes idle money.

What is strange about this part of the cycle is that along with these great pools of idle money there is a huge amount of debt left over from the last cycle. We’re not talking public debt, which when you factor in Federal, State, and Local stands at a postwar high of over 90% of GDP. Private debt of all kinds is still at 250% of GDP, after having declined from a high of 300%.

If you want to talk about income inequality, you don’t have to look at how salaries for work are tracking against income from investments. The world is currently divided into those with a lot of debt and those with a lot of cash. That’s the macro view of the problem, and it’s been estimated that it will take 25 years for us to grow into our debt. Unless we do enter a period of high growth or inflation, that is, and we can reasonably see higher levels of both on the horizon.

Debt has been creeping up for a long time.  It will take a long period of "deleveraging" to creep back down.

Debt has been creeping up for a long time. It will take a long period of “deleveraging” to creep back down.

That debt is about half corporate and half household, so a good chunk of it will go away as people die off or declare bankruptcy, too. But from a total debt around 350% of GDP we have a lot to shed before we get back to the 1970s era level of less than half that much. Either we do it or we don’t – but either way it will be the big story of the next few years.

We’re caught up no on a few big stories that we’ve been covering. Have a few more insights to add? We’re all waiting for the next big Russian offensive in Ukraine, but that story is big enough that it’s worth waiting for it to happen before we discuss it. Expect it as soon as they can come up with a plausible excuse, or even a really lame excuse.  Until then, may all your news be really new.

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4 thoughts on “Catching Up on Old Stories

  1. There is nothing about the price of gasoline that isn’t infuriating. Everyone all along the chain knows that they have the world by the b@!!s and nothing is done to stop them. Will the refineries be investigated for collusion? How else could they all have run up their profits at the same time? This makes me mad as hell.

  2. re: the wall street traders, congrats again on making some sense out of nonsense. Where do we get these people?

  3. Pingback: Bad Weather Ahead? | Barataria - The work of Erik Hare

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