Sushi Money

Spent a great weekend mostly outdoors enjoying some beautiful Autumn weather.  Don’t you just love this time of year?  The leaves are changing colors, the air is crisp and cool, and it gives us a chance to catch up on things we’ve put off for too long. It’s also just plain fun to explore the countryside and get out a little more, especially with lower gas prices! We even marched in a parade this weekend, listening to the sounds of a high school band.  For all the challenges the nation faces, it’s great to see people involved in the community and enjoying the timeless traditions each year.

Gas prices in our area have fallen drastically in recent weeks.  You can sense relief at the pump when filling up.  It’s all part of the great unwinding of leverage.  The more we read about the financial mess it appears that hedge funds and other large insitutions have caused much of the drop in share prices through liquidation of investments in order to raise cash.   Some people believe this unwinding will continue with more downward pressure on stocks.  Others believe we’re close to a bottom, and even Warren Buffet is pitching to buy stocks right now.

As for oil prices, we don’t see those “experts” talking about $200 or $300 oil anymore. In fact, many people believe oil could fall below $60 a barrel for some time, and OPEC is scrambling to put production cuts to shore up prices.  

“OPEC, supplier of about 40 percent of the world’s oil, may pare output by 1 to 2 million barrels a day in stages to stabilize prices, said Chakib Khelil, the group’s president. Deutsche Bank AG lowered its 2009 crude oil price estimate by 35 percent to $60 a barrel, citing the possibility of a “major world recession.”  

Maybe they’ll succeed for a time, but how anyone can say that consumer demand was the primary reason for the runup of oil prices is beyond me.  Yes, there is huge demand for oil- too much demand as the U.S. is dependent on foreign oil and prices rose sharply. But that is only because supply was so restricted, and speculation by investors also impacted demand.  Speculation has played an enormous role in our oil markets in recent years and now we’re seeing prices stabilize with the unwinding of leverage and credit crisis impacts. 

But guess what?  Lower oil prices may not last beyond a few months or a year or two because the world’s appetite for oil continues to increase and we’re still not producing enough here in the U.S.

There is real demand for oil globally, and there are only so many places we can get our oil from. So yes, the price we pay for oil will be driven by the demand and the supply of oil we can produce or import over time.  Investors will also return to the oil markets and at some point we’ll see prices rise again.  Let’s hope that between increased production in the U.S. and reduced demand through higher mileage and alternative vehicles, that prices won’t rise quite as high as they did this year.

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In other news I will say that I was bothered that Barack Obama raised over $150 million dollars during the month of September alone.  That’s more than George Bush and John Kerry raised combined during the 2004 election!   Why does that bother me?  Mostly because he’s taking money from private sources, instead of public funding like John McCain.

With public funding, we know where it comes from, who gives it, and there are detailed records and accountability.  Senator Obama had earlier pledged to stick to public funding, but later changed his mind and broke that promise, taking millions from private sources instead.  Where is that money coming from?  Who are the people and institutions that are “buying their way” into the campaign coffers of one of our Presidential candidates?  

I’m no expert but I thought that campaign finance reform was supposed to reduce that type of thing?  In any event, Senator McCain is not lacking for funding either, although he’s behind Obama.  McCain received a big chunk of matching dollars to help finance his campaign:

“Helping Sen. McCain keep up was the one-time, $84.1 million in taxpayer matching money he received in September. Sen. Obama won’t get such a one-time payment because he opted out of public financing after first suggesting he would participate, a decision that has cost him some political points.”

“Public financing gives candidates taxpayer money for their campaigns, but it also requires them to hew to spending limits and essentially stop fund raising for themselves during the general election. The parties can continue raising money for the candidates; however, much of their spending must be conducted independent of the presidential campaigns. By opting out of public financing, Sen. Obama is free to spend as much as he can raise.”

“McCain spokesman Tucker Bounds said the campaign can overcome the fund-raising mismatch. “We are going to be competitive because, despite Barack Obama’s best efforts, this is an election not an auction,” he said.”

“The Obama campaign has also fielded criticism from Republicans for what they say is a lack of donor transparency. Federal rules don’t require disclosure of donors giving less than $200. Small donors account for about half of Sen. Obama’s 3.1 million contributors.”

I will say that I’m tired of being bombarded with tv advertisements for the candidates. We don’t watch much tv, but do have it on in the evenings.  The “I’m so-and-so, and I approve this message” line is getting really annoying.  I find myself hitting the mute button, regardless of which candidate’s advertisements are playing.

I do have a preference for one candidate over the other at this point, but I would rather not make this a politically focused discussion.  I will say that I think the nation is so much greater than any one candidate, President or their administration.  If I have any concerns, it is more about a possible Liberal Supermajority taking over the nation’s highest offices as President and in Congress.  I don’t think either party should have a lock on both Congress and the Presidency.  That gives the politicians nearly free reign to pass whatever legislation they think is okay. 

Yet regardless of who is elected this year, I think we’ll be fine.  Both Senator McCain and Senator Obama should be able to gather effective representation within their party to lead the country through the recovery over the next four years.  It may be a little more painful in some areas such as taxation or spending cuts, but we’ll get through it.  I think the nation’s political focus also goes in cycles.  It may be time for more change than many of us are prepared for!  But in another four years we can revisit the process once again.  Have a good week.

The past week was the worst ever for stocks in the Dow’s 112 year history with the index falling almost 21% over seven days.  Friday was the eighth down day for the market, unprecedented in scope and duration.   Almost everything has fallen, and there were few refuges for those seeking safety, apart from cash.

“…Until now, the Dow’s worst week was in 1933. Total trading volume of stocks listed on the New York Stock Exchange also hit a record, 11.16 billion shares.”

“The damage has been devastating both to households and to major investment institutions. Investors’ paper losses on U.S. stocks now total $8.4 trillion since the market peak one year ago, based on the value of the Dow Jones Wilshire 5000 index, which includes almost all U.S.-based companies.”

“The blue-chip average is down 40% from last October’s record, its biggest decline since 1974.”

 And that’s the hard part for so many people to understand.  Retirement funds in 401(k)’s and IRA’s are taking an enormous hit, and some folks are throwing up their hands and selling everything.  Think you’re safe with gold?  Not yesterday as gold prices fell Friday after weeks of gains.  

“Gold for December delivery fell $27.50, or 3.1 percent, to settle at $859 an ounce on the New York Mercantile Exchange earlier falling as low as $829. The metal has dropped for two straight sessions, at least temporarily halting a big move upward as investors shifted funds into gold and silver to take advantage of their perceived safe-haven appeal.”

“But as U.S. stocks continue to slide, large institutional investors have been forced to sell gold and other commodities to meet margin calls and other requirements, said Jon Nadler, analyst with Kitco Bullion Dealers Montreal. In a margin call, investors who borrowed money to buy stocks are forced to repay the loans.”

“If stock markets continue their current trend, then there is little doubt that margin call liquidations will continue to negatively impact gold and oil,” Nadler said.

With the wholesale liquidation of stocks and commodities in the market, it also looks like the oil bubble has finally popped.  What does that tell us?  Was there truly so much demand that less than a year ago the price of oil was $147 per barrel with many predicting $200 oil?   And is there really so little demand now that oil is less than $82 per barrel and falling?  

Some are calling it “demand destruction” citing rapidly falling demand for oil by consumers and businesses in recent months.  But the credit crisis has exacerbated the impact of corporations and traders who would borrow money to purchase oil contracts.  However you look at it, speculation and the unwinding of large financial institutional bets in the commodities sectors have played a large role as well.  Have you seen the prices for corn or soybeans?  All down sharply.  

The good news, at least for now, is that gas and food prices should not be rising significantly over the near term, and many prices may fall.  I was looking at the price of three-dozen eggs at a big-box store the other day.  Last year the price rose from $2.99 to $5.99 presumably based on fuel costs.  The price is now down to a more reasonable $3.59 for those same three-dozen eggs.

Not only has the money flow dried up in many areas, consumers are also tigtening their wallets in response to the financial crisis.  All of this has a compounding effect, at least for a while.  My concern however is what happens next?  A few months down the road after this “unwinding” and liquidation of assets by the large institutions, will we face renewed pressure on the prices of goods and services? That’s the view of Jim Rogers and others, citing a pending “inflation holocaust.”  For the short term however, it would seem the threat of slower economic growth is of greater concern than the threat of inflation.

The more important question for many people right now is “What to do?”   That’s a question that every investor, or their financial advisor, must try to answer and to understand the longer term implications for their clients’ goals.  Many of us believe the government is making progress and that with time and increased capital, the markets will stabilize.  How soon that takes place is anyone’s guess.  

There are advisors recommending “sell” and others saying “stay put.”  A bold few are actually buying in the market, picking and choosing among beaten down stocks at bargain prices.   Personally I took the opportunity to sell some losing positions, and reallocate that money among some of those bargain stocks.   In my IRA I sold a portion of a conservative mutual fund to reallocate that money in a growth fund that had fallen sharply.  Am I early?  Maybe so.  We may yet see weeks more of losses, but it’s a bet I’m willing to take with money I won’t need for a decade or more.

I don’t believe the nation is headed towards depression-era times, but we obviously have many challenges ahead.  Some think it could get a lot worse, and it’s worth looking at What History Tells Us About the Market.   Reading that article is a sober wake-up call to how bad it was, and how bad it could be.  For now most of us are just watching, dazed and wondering when it will all turn around.

“The entire nation, it seems, is in the grip of what psychologists call “the disposition effect,” or an inability to confront financial losses. The natural way to palliate the pain of losing money is by refusing to recognize exactly how badly your portfolio has been damaged. A few weeks ago, investors were gasping; now, en masse, they seem to have gone numb.”

But amidst the financial carnage, we also hear what may be the siren song that the other side of crisis is opportunity.

“This collective stupor may very likely be the last stage before many investors finally let go — the phase of market psychology that veteran traders call “capitulation.” Stupor prevents rash action, keeping many long-term investors from bailing out near the bottom. When, however, it breaks and many investors finally do let go, the market will finally be ready to rise again. No one can spot capitulation before it sets in. But it may not be far off now. Investors who have, as Graham put it, either the enterprise or the money to invest now, somewhere near the bottom, are likely to prevail over those who wait for the bottom and miss it.”

History tells us that people tend to buy at the highs, and sell at the lows.  We may not be quite at the lows yet, but selling now is basically the same thing.  If we’ve learned anything in this market it’s that the word “risk” doesn’t mean what we thought it did.   We’ve now discovered how sensitive we are to seeing portfolio losses when the downside really hits.  Risk tolerance has changed for many of us, and a whole host of moderate and aggressive investors are now joining ranks with their conservative peers. 

If you’re dollar cost averaging with retirement funds, or 401(k) contributions, I would certainly continue to do that. The market may trend lower in the months ahead, and dollar cost averaging works in your favor. But my standing philosophy remains:  Cut spending, Pay down debt, and Increase savings.  Focusing on those three things is a prerequisite to financial stability.   If you’ve got those three things under control, then continuing to invest, or increasing investments is worth considering.

How long will it take until we see traction and more stability in the financial markets?  I think it will be weeks rather than months.  However long it takes, I am unapologetically optimistic about the nation’s future and the future of our free-market economy.   Hang in there, and have a good weekend.

Lots of traveling lately, but it’s time to get back to work.  I’ve had a chance to see the economy first-hand from the road.  Gas prices are cheaper, but it’s been an expensive month of traveling. Sure we appreciate that gas prices have come down recently, but will it continue?  In my opinion, not without a firm comittment by our political leadership to reign in excess oil trading and speculation.  Even though gas prices are moderating, don’t expect it to help much with food prices at the grocery store.

So many of us have shaken our heads in amazement that gas prices could rise so fast over the past year.  It just didn’t seem natural, and we wondered how so-called demand could influence the price of barrel of oil so quickly.

Well as we’re finding out, it wasn’t natural and real end-user demand had little to do with the prices seen in energy markets this year.   There was demand however, just not the kind we think of.  The demand for oil that has driven prices sky high has actually been caused by speculation demand, and the oil markets have effectively been cornered by a few large firms.  David Cho of the Washington Post lays out the arguments pretty clearly:

“…when the Commodity Futures Trading Commission examined Vitol’s books last month, it found that the firm was in fact more of a speculator, holding oil contracts as a profit-making investment rather than a means of lining up the actual delivery of fuel. Even more surprising to the commodities markets was the massive size of Vitol’s portfolio — at one point in July, the firm held 11 percent of all the oil contracts on the regulated New York Mercantile Exchange.”

“The discovery revealed how an individual financial player had gained enormous sway over the oil market without the knowledge of regulators. Other CFTC data showed that a significant amount of trading activity was concentrated in the hands of just a few speculators.”

How does it make you feel that huge investment trading firms can hi-jack the global economy?  Think tighter oil trading regulation doesn’t matter?  Tell that to countless folks at the gas pump who are having a difficult time commuting and putting food on the table.  Or those small gas stations and shops that have closed their business because they couldn’t pay such high prices and attract enough customers.  Tell it to countless small towns across America that lost out on tourism and business because people just couldn’t afford to travel and visit.  Tell it to the airlines, the real estate industry and those of us standing in the grocery store aisle wondering how it came to this. 

“CFTC data show that at the end of July, just four swap dealers held one-third of all NYMEX oil contracts that bet prices would increase. Dealers make trades that forecast prices will either rise or fall. Energy analysts say these data are evidence of the concentration of power in the markets.”

I’ll be honest, this makes me angry.  And disappointed.  I think our country can do so much better, and the political leadership could stand up and say “Enough!” and do whatever it takes to reign in energy market speculation.  We’re still living with the ghosts of Enron. 

“Oh, come on…” I hear some folks saying, “It’s not that bad.”   Well if you have a pretty decent income and no problem paying bills then perhaps it’s not.  But think of all those folks on the margin of poverty and the middle class struggling to take care of their families.   The last year or two have been disastrous for so many families, compounded by and continuing to affect the real estate markets.

The hard truth is that most of the “best and brightest” in this country have argued amongst themselves over the issues while oil prices continued to rise.  Too many have stood by and watched as our economy has been shaken from the inside out, affecting consumers at every level of economic need.  It’s been a runaway energy trading bubble and may continue to be in the future if we don’t change something.  Investigating trading practices is a pretty good start.

Yet even the Commodities Futures Trading Commission can’t admit the role that speculation has played in the energy markets. 

“To date, the CFTC has found that supply and demand fundamentals offer the best explanation for the systematic rise in oil prices,” CFTC spokesman R. David Gary said.

Sure it’s supply and demand… the demand created by excess speculation and trading! The bottom line is Congress must close the Enron Loophole.  We have politicians and civilian leadership that simply cannot separate their understanding of the impacts of energy trading and speculation from legitimate business need in the commodities sectors.  

“For most of the past century, regulators put limits on financial actors to prevent them from dominating commodity exchanges, which were much smaller than the bond or stock markets. Only commercial operations, such as farms, airlines, manufacturers and the middlemen that handle their trading activities, were allowed to buy nearly unlimited quantities. The goal was to allow these businesses to minimize the effect of price swings.”

How do we justify allowing trading organizations to purchase unlimited quantities of “paper oil” that won’t actually be used or delivered?  It makes little sense except to wonder how we allow such sway over energy markets by the major investment firms.

“When the CFTC granted the 1991 hedging exemption to J. Aron (a division of Goldman Sachs), it signaled a major shift that has since allowed investors to accumulate enormous positions for purely speculative purposes,” said Rep. Bart Stupak (D-Mich.) Now, he added, “legitimate businesses that hedge and take physical delivery of oil are being trampled by the speculators who are in the market purely to make profit.”

A second turning point came when Congress passed the Commodity Futures Modernization Act of 2000. The law formally allowed investors to trade energy commodities on private electronic platforms outside the purview of regulators. Critics have called this piece of legislation the “Enron loophole,” saying Enron played a role in crafting it.

I’m not an oil conspiracy fanatic, but it seems as if too many politicians and civilian leaders are unwilling to admit to the damaging role that investment firms play with regard to affecting commodity prices and ultimately their impact on the economy.  Sure they also play a vital role in providing capital and smooth functioning of commodities markets.  But greed can do a lot of harm over time.  Just like the nation had to break the monopoly over oil markets a century ago, we have a new monopoly.  It’s not just the oil companies this time, it’s also the investment banks across the globe.   

Do I think we need to drill more for oil at home?  Absolutely, even knowing that it will take years to change the status quo.  We’ve also got to continue the push to alternative energy.  I think we can do both, and I think John McCain’s got it right when he says we need to stop sending billions of dollars overseas and get Congress back in their seats to hash out the debate.  

But McCain’s got it very wrong if he’s going to defend the Enron Loophole.  We need to overhaul commodities trading regulations both at home and abroad.  It’s time to take America back and chart our own energy future.  And it’s time for change and real leadership. I believe we’re going to get there.  But it won’t happen unless we continue to make the case, and tell the politicians what we think.  Let’s hope the economy hangs in there while we wait.

For most of us in the U.S. prices at the gas pump are ridiculously high.  It would almost be funny if it wasn’t such a crucial issue for the national economy and consumers.  When I filled the tank the other day it was staggering to see the difference in cost from just months ago.  We don’t know if gas prices will remain high or continue higher in the years ahead, but global demand is still growing which makes it likely. These prices are almost inconceivable in some ways, and when you’ve got to make a long commute each day it’s hard to reconcile paying a larger chunk of the monthly budget to get the same amount of miles out of a vehicle.  Those chunks of the monthly budget add up to real dollars over time- dollars that we are giving up in saving for our future retirement security.

Many people in Europe or other nations have little empathy for U.S. drivers, but our country is so large that many of us routinely drive for an hour or more one-way to work each morning. It’s not uncommon for many of us to put over 75 or 100 miles on the car each day.  It’s a fact of life based on our geography that many of our own citizens often forget.  Those of you living in the city or suburbs of a large metropolitan area may not commuite or drive quite as far.  But many other people live in rural areas far from any metropolitan city and must not only drive long distances to work, but also to see a doctor, receive medical care or simply shop for groceries.

Obviously some of us drive vehicles that use a lot more gas, and it’s dawning on a lot more people that the money we spend for gas is simply being wasted on gas fumes.  Sure we love our big cars and trucks, but at what point are we willing to give up our future retirement security by driving a comfortable car?  Do we really need such a big car?  Maybe. But I believe that more Americans will give up the luxury of a larger car for the convenience and economic bonus of driving a smaller car. 

Most of us will never really understand the reasons for the runup of oil prices.  Demand is obviously a huge issue worldwide and speculation is being looked at more closely for the impact to high prices.    It is somewhat amazing that large investment banks can control enormous trading positions in oil and gas reserves.  Even billionaire George Soros sees much of the energy price runup due to “craze-following” behavior by financial institutions.

But regardless of the cause, the energy crisis is here and is causing a major shift in U.S. consumer behavior.  The media has begun reporting on the extinction of gas guzzlers in the U.S. as well as how American companies are reeling from energy costs.   U.S. consumers have cut back on gasoline use for the third month in a row, and the airlines are struggling as never before as corporate costs will continue to be passed to consumers. 

“Pressure from higher energy costs is already being felt, with Kimberly-Clark announcing it intends to raise prices on its consumer goods products 6 percent to 8 percent in the third quarter. The maker of Kleenex tissues and Huggies diapers said higher energy and raw materials costs were to blame for the price increases.”

We’re seeing price increases all around with food, energy and a greater number of retail goods.  The point is simply that high gas prices and the related impact on the family budget are a very real personal financial planning and retirement issue.  In what way?  Based on the cost of ownership of various vehicles, including how much it costs to put gas in the tank.  Don’t get me wrong, this is a free country and I love a big vehicle to move people and stuff around when I need it.  But when I need it is the important part of that sentence.  Most of us are realizing that we don’t really need quite as much car or truck as we thought we did. 

The New York Times describes how we’re staggering under the cost of $4 gas while examining the cost of ownership of various vehicles, and why consumers are changing their minds about what they’ll buy and drive these days:

“While the F-250 costs $100,000 and a fully loaded F-150 ” the better-known, smaller Ford pickup ” costs about $70,000, a Ford Focus still costs less than $40,000 over five years. A Honda Civic Hybrid does, too. A Toyota Prius costs only a little more. A Subaru Outback station wagon runs $50,000 or so.”

“To put this in perspective, the difference between a Focus and an F-250 over five years is $60,000. The annual pretax income of a typical family in this country is also about $60,000. So choosing a F-250 over a Focus is like volunteering for a 20 percent pay cut. The relative resale values might cushion the blow a little, but not much.”

“That™s why more people are deciding that towing capacity and the other benefits of pickup trucks and S.U.V.™s are not worth the costs. The F-250 may still make sense for some business owners. But, as Mr. Fisher says, on those few occasions when the rest of us need to move some horses, we can rent a truck. œThe new economics of car buying is, ˜Don™t overbuy,™  he told me. œBuy something you™re going to need most of the time.

That’s a great example for the impact of gas prices based on the type of vehicle we drive (it’s still somehwat incredible to me that U.S. automakers have been so ill-prepared to deal with this shift in need and demand!).  

But sky-high gas prices affect everything, including retirement security for you and me.  What are we giving up in future dollars and earnings simply to drive that big truck around town?  If I were to run the numbers it would be staggering.  Think of  the tremendous amount of money over time and it’s not hard to see how $30,000 to $40,000 over five years can become an incredible sum of money.  So what we drive each day and how much money we spend on it can make an enormous difference in our ability to save discretionary income for retirement. 

It’s not all about gas prices either.  While we continue to see price increases at the grocery store, it’s only a matter of time before wage increases won’t keep up.   The fact that wage inflation is under control right now may be more due to widespread economic challenges rather than anything else.  As the business cycle heats up again in the years ahead I have to believe we’ll see stronger inflationary pressures and rising interest rates all around. Fuel prices may be even higher.  If it costs more to live in the years ahead we need to think hard about how much money we’re willing to give up from savings right now.   Every dollar we save by driving a higher mileage vehicle means more dollars saved in the years ahead.

With that said, it’s a pretty good time to re-think the monthly budget, and and how much we’re willing to spend each year on fuel costs.  I’m not willing to sacrifice my future retirement security by spending so much money on gas.  Like many people I’m just not sure what I’ll do about it yet.  But I suspect a better mileage vehicle may be in our future.

How long are the elected leaders within the U.S. going to let OPEC, oil companies and investors determine the price of oil and the price of gas that consumers across the country pay to put in their cars?  Oh, well maybe that’s the way the free market works. 

But when the price of oil doubles over the last year, there’s something wrong with the free markets.  Maybe they’re not so free after all, and between the oil producing nations, the giant oil companies and enormous investment and commodity trading practices, consumers are paying a premium that just doesn’t seem fair.

So now the politicians continue to blame the oil companies for these problems, wringing their hands over what to do.  Of course there’s enough blame to go around for everyone it seems, even those of us driving gas-guzzling vehicles that cost a fortune to fill at the pump. 

But the Congress itself is also to blame, even though they recently passed the symbolic NOPEC law targeting the OPEC nations for potentially monopolizing oil.  Some journalists have astutely observed that Congress is really doing the same thing that they have accused OPEC of doing:

“This [law] is designed to make OPEC™s activities illegal. But here™s the problem: All that talk about œlimiting the production of oil could apply to Congress just as much it does to OPEC. Thomas Pyle, president of the Institute for Energy Research, comments:

“The Congress itself is guilty of committing the crimes outlined in this legislation. In fact, it is a repeat offender. The only difference between the Congress and OPEC in this regard is that OPEC is willing to produce oil for its citizens and its economies. The U.S. Congress, unfortunately, is not.”

“Pyle is referring to Congress™s refusal to lease more public lands for oil and natural-gas exploration. His group receives substantial funding from the oil industry, but he makes a point that even an environmentalist can appreciate. Congressional Democrats, together with a few moderate Republicans, have killed repeated attempts to open America™s Arctic National Wildlife Refuge (ANWR) for oil exploration, and Congress has barred states from deciding whether to allow drilling on the Outer Continental Shelf in the Atlantic and Pacific Oceans and the eastern Gulf of Mexico. All these actions were taken, in part, to limit carbon emissions. But if NOPEC somehow managed to reduce oil prices (which it will not), it would do so by pressuring OPEC to increase oil production. And any OPEC increase large enough to lower prices would cause far more carbon emissions than any potential increase in American production.”

But what about the oil companies?  If the oil companies are guilty of something, it’s their ignorance and hubris at failing to understand how oil prices are affecting the American economy and consumers.  Instead of defending their profits, which of course is the goal of any business, oil companies should be working with government to solve both the demand questions and the speculative investment concerns. 

So is the price of oil running up purely because of fundamentals with demand and the price of the U.S. dollar?   From a long term view there’s little doubt that the fundamentals and global demand have determined the prices we pay.  But the debate regarding the influence of investment speculation is valid, especially in recent years.

Some have cited that it’s not like other commodities such as corn or wheat.  No one is “growing” more oil, although they could be doing more exploration to find it.  In the face of increasing demand however, and managed (aka OPEC) production, prices are generally going to head up.  Paul Krugman looks at it as a consumption versus supply storage issue, and hence prices influenced by those dynamics.  Is it that simple? 

I guess it depends on how you look at it.  If consumer demand decreases, we would like to think prices at the pump would fall because inventories would rise.  But what if the oil companies also do not demand enough oil purchases from producing entities?  In other words, rather than store excess oil,when the oil companies see reduced demand they simply don’t buy more oil from OPEC and inventories actually fall.  When inventories fall, supply is reduced and prices are going to head up.   So are the oil companies to blame? 

Maybe the oil companies don’t manage demand per se, but they do influence inventory and refinery production immensely.  Are they making money at the expense of the American consumer?  Sure looks like it.  But so are the investment banks and hedge funds. 

Are we in a speculative bubble with oil prices too?  Probably.  But unfortunately, the long term view indicates the fundamentals of supply and demand will be the primary driver governing oil prices.  Without more oil, and greater oil and gas refinining inventories, we will continue to pay higher prices.

So what else could government be doing?  The politicians could provide incentives for building new refineries, and open up regions for drilling both in Alaska and off the coasts of the nation.  One of the oil company executives made a pretty good statement when replying to one of the politicians in congress:

“This is the only country in the world that denies its citizens access to known reserves of oil and gas.”

Think increasing drilling won’t help?  Actually it would help incredibly, but takes time.  For the past decade too many people- mostly politicians- have argued against it, rather than doing something about it.

“If the nation set a goal of increasing domestic production by 2 (million) to 3 million barrels a day by opening up new sources of exploration and production, we could demonstrate to the world that we are in control of our own destiny,” Shell Oil Co. President John Hofmeister told a Senate panel.

It would probably be a lot more than that.  From the National Review article above,

“The amount of oil we could produce is not negligible. Take ANWR, just one of several untouched sites that contain known oil supplies. Based on figures from the Energy Information Administration, ANWR alone could produce enough oil (in 2004, the EIA estimated 900,000 barrels per day by 2025) to make 6.4 billion gallons of gasoline annually. Because producing and refining five barrels of oil requires energy equivalent to one barrel, this translates to a net energy gain of four-fifths that amount, or 5.1 billion gallons of gasoline annually. That is enough gasoline for 13 days of American consumption at the current rate. Moreover, Uncle Sam would make somewhere between $150 billion and $300 billion on ANWR leases over the estimated life of the oil deposit.”

That’s actually a lot of oil production, and would offset and compete with the prices for imported oil. What about off-shore drilling? We could expand or build new refineries if we really wanted to. I wonder if we’ll reach that point… more importantly, we need to develop an energy plan for the next 50-100 years for the nation.

If our elected leaders would simply throw politics aside for a moment (!), maybe we could get off the Blame Train and have that Energy Summit and start working on a way forward for the nation. 

One of these days we’re going to find ourselves not needing quite as much oil with highly efficient vehicles running around the roads.  I believe technology and the stark economic realities will foster the transition to new types of alternative fuels and the demand for oil will drop over time.  Maybe there will be some cataclysmic event or technological marvel that revolutionizes transportation.  Can you imagine what would happen if we discovered something that effectively negated the need for oil-derived fuels for public transportation across the nation?   Energy independence! What a great concept.

Whatever the future holds, the OPEC nations won’t always be showered with U.S. dollars as we buy endless barrels of oil.   Indeed, OPEC really should get smart and start pumping more oil. 

For more on The Oil Conundrum see:

• The Oil Conundrum Part III: Who’s On First?

Okay, the rebate check is in the bank and we’re going through the budget again.  I was shaking my head at the price of groceries and gas today, but it’s hard to see much of an economic slowdown by the amount of traffic out on the roads.  People must be cutting back though because everything has gone up in price recently. I’ve even heard some of the restaurants are struggling. 

We’re learning like never before how fuel prices really impact consumers and the needs of the family.  Simple things such as a trip to a nearby town are put off until really necessary, and I find myself driving a lot slower than I used to.  Some enterprising automaker should come up with a really efficient vehicle they call the Frugal.   I’d call it our Family Frugal and drive it proudly around.  Not a very sexy name perhaps, but heck I’m all about practical efficiency these days.  Actually it sounds kind of like a Volkswagon… Das Familie Frugal.

Ah but we use fuel for more than our vehicles.  We use propane fuel for some of our winter heating needs, and I usually fill the tank in late spring each year.  But with oil prices out of control, propane prices are crazy high too.  Do I fill the tank now, or wait until next fall or winter?  I’m inclined to wait and see if somebody… anybody, will do something about the rampant speculation in the oil markets out there.  At some point these high prices are bound to blow off.  It’s bad enough with gasoline, but the debate even involves diesel fuel supplies which are tighter and more expensive.  It’s a problem we need to solve because it affects everything- driving cars, trucking and transportation for goods, grocery prices, heating, etc, etc.

Members of the House Transportation and Infrastructure Committee’s Highways and Transit Subcommittee generally agreed that diesel prices have risen faster than gasoline prices, and that increases are reflected in higher food and merchandise costs. But they broke along party lines in suggesting ways to address the problem.”The conventional wisdom is that speculation provides liquidity to the market. But when you have a huge entry of people who have no intention of taking delivery of a commodity but are merely interested in making money by bidding prices higher, that’s a different matter,” Rep. Peter A. DeFazio (D-Ore.), the subcommittee’s chairman, said in his opening statement.

But Tyson Slocum, energy program director at the consumer advocacy group Public Citizen, agreed with DeFazio that speculators are exerting an unhealthy influence on energy commodity markets. “A certain amount of speculation or hedging is essential. But we have a financial bubble resulting from too much speculation. About 95% of the trades today do not involve taking delivery,” he said.

DeFazio still was interested in the possible impact of speculators on oil prices. “What would it hurt to have trades no longer opaque and off the books?”

I’m a pro-business, free market kind of guy, but when you have a critical commodity that drives every aspect of the national economic engine, how can we allow speculators and commodity investors to leverage investments in oil contracts that will never be delivered?  And if oil prices just keep going up, can the U.S. economy and consumers even survive in that environment?

Here’s one for you:  Just yesterday I was talking with the local propane company manager about fuel prices and my propane bill, and he spoke of a close friend who was a truck driver.  This guy regularly drove from the midwest roundtrip to the south and southwest, but his normal routine was to fill up his truck’s fuel tanks in Mexico!   “Why does he do that?” I asked, and the answer was that truckers can buy a cheap $20 pass to cross the border to buy fuel and they pay half the price for gas and diesel that we pay in the U.S.!   

Why does gasoline or diesel fuel cost half as much right across the border in Mexico than it does in the U.S.?

I don’t know how accurate that is, but the propane company manager I spoke with said it was true.  Perhaps Mexico has more reserves for oil, more drilling, more refineries… oh, maybe that’s why it costs less?   Even so, should petroleum products be half-price just across the border?  If it is, then we’re doing something wrong here in the U.S.  Hey, maybe we can tie in some of the immigation issues with cross-border agreements for oil or fuel?

But with the economy still teetering on the edge of a recession, at least Alan Greenspan thinks that ”the worst of the credit crisis is behind us.”   But what about inflationary costs to consumers for fuel and grocery prices?  I’m really not sure what Congress is doing beyond posturing and looking at raising taxes.  Is raising taxes on fuel and energy companies going to save consumers money?  I don’t think so.

I’m still calling for a U.S. Energy Summit however.  We’re not going to get anywhere if people don’t stop pointing fingers.  They need to sit down and map out the issues- start taking proactive measures and move forward with a plan for the nation. 

But in other news at the homefront, we’re busy planting a garden this year.  A different kind of fuel for the family perhaps, and another way to live a little more frugally.  With a little bit of space, how hard is it really to grow a few vegetables?  Especially tomatoes, but this year we’re even planting corn.  It’s much cheaper to grow your own, but admittedly it does take some effort to get started.  But if we’re successful and have enough veggies, it will cut down on the grocery bill.  And we hope to freeze and put up some of the extra to last into winter.  Now if I could figure out how to grow our own fuel for the cars we’d really be doing well. 

That’s the mantra this week as Congress is set to grill oil company executives about fuel prices and supply concerns.  Well it’s more like the political folks have a chance to give some of the heat they’ve been taking from their constituents, back to the oil companies.  I’m all for that- not just to give the oil execs an earful, but also to see our politicians trying to find some answers.

What argument can be made in defense of big oil when they are reaping enormous profits each year?  It’s a business to be sure, and they are in business to make money like any other business.  But when the oil companies profit seemingly at the expense of the national economy, and mom and pop in small towns across America, then you have to wonder where our priorities are.

The problem is that Congress in all its wisdom may decide to tax the he#l out of the oil companies, and while that money goes straight to Uncle Sam to help pay (or expand?) government programs, it’s not solving the issue of getting more oil, or becoming more oil independent.  Think it’s going to change anything for the average family?  I don’t think so- in fact, gas prices will probably get more expensive because the oil companies are paying extra taxes.

Realistically, U.S. consumers pay some of the lowest fuel prices in the world compared to many other net importers of oil.  But that doesn’t change the fact that we are paying more than we have ever paid here in the U.S., and it affects the household budget at home in many, many ways.  Not the least of which are higher grocery prices.  Overall it’s sad that we have put ourselves in this position- but it’s the truth.  When no refinery has been built in the past 30 years in the U.S., what does that say about our priorities?  When we can’t further develop off-shore or Alaskan oil fields because the politicians are too concerned about their re-election and don’t want to appear anti-environment, then we are left to import oil from every third-world nation that has it. 

We are truly slaves to the oil trade- and we will pay what the market will bear.  The oil companies are not the really bad guys, but they aren’t helping matters either.   They’re going to grit their teeth and smile that toothy smile to make their margins.  But some of those margins are squeezed as well.  For example, in order to find and get at some of the vast resources of deep oil, they need specialized deep sea rigs.   These are amazing feats of human engineering. Billionaire John Fredriksen is Norway’s richest man, worth at least $7 billion, and he leases these things.

“His units are in such demand he can charge major oil companies nearly $600,000 a day to use them. Similar rigs were earning about $70,000 a day just five years ago. With leasing rates like these, a vessel that cost half a billion dollars to build can pay for itself in as little as four years.”

So who pays for the use of such beasts?  We all do.   We are all faced with limited supply, and too much demand across the world.  The oil is there- we just haven’t planned ahead and there are too many pigs at the trough.     I say bring back the Oil Price Wars, and let the government cut out the middle-man.   Oh wait… there’s probably not enough supply to have an oil price war.We do need to lessen our dependence on foreign oil. 

We need to foster alternative technology, and yes- we need to develop and build nuclear power plants to help supply our energy needs so we aren’t using natural gas or coal to do so.  And we need to stop kicking the empty can and try to produce enough of our own oil to fulfill the needs in our own country. Or we can abandon all that when someone invents the next miracle engine, fuel or transportation device…   

Personally I think we should build out a vast network of maglev trains and small commuter vehicles.  Begin in the suburbs of the major metropolitan areas and let them grow.  This could be the rail and gold spike victory for the next century.  And somewhere during that timeframe, we might even be able to abandon the use of oil for fuel altogether.

The news on the U.S. economy has seemed like a dogpile of negatives lately. I can’t help but wonder if perception is worse than reality in so many ways, and just maybe the economic tide is turning? There’s still a lot of negative news, but it’s not all bad lately. Even some realtors and tech execs think next year is looking better. And a few more institutions are looking ahead with predictions for a solid 2008 for the market.

I can’t pinpoint it of course but I think the worst (housing, mortgage, and credit issues) are behind us from a macro perspective. Here’s a great quote from an optimistic Bloomberg article that sums it up pretty well:

“A crisis leaves in its wake a wonderful rally cocktail of lower interest rates, lots of liquidity injections, cheaper stocks and a lot of pessimism,” said James Paulsen, 49, who oversees about $200 billion as chief investment strategist at Wells Capital in Minneapolis. “The period of greatest uncertainty or angst often begets the next ride.”

Tomorrow the Fed may cut rates again- my guess is a quarter point. If they hold steady the market won’t like it much however. And I’m not much of a heavy metal guy, but a little gold in the portfolio would have been helpful this year. If things turn positive next year we may be near the top for gold. Investing in the oil/energy sector has helped ease the “pain at the pump,” and at least oil prices have stabilized the past couple weeks. I was long in an energy fund from ‘04 to ‘06 and got out after huge gains… not a very smart move, but it looked like the top at the time. Should have known better… there is no top for oil near-term! Learned from that one and bought a couple of energy stocks to hold long term, which are doing just fine, thank you.

Forbes says San Francisco is the most expensive city in the U.S. to buy gas for your car, exceeding $3.50 a gallon. Ouch… of course those “most expensive places” also have about the highest salaries in the nation. But Houston or Dallas is averaging around $2.90 and St. Louis is about $2.74 this week.

By the way- do you drive an economy car or a hybrid? No hybrid here, but we do have a 45 mpg little Metro that earns its keep after the ‘99 sedan conked out in the garage. I haven’t thought much of flex-fuel vehicles that use the ethanol E-85 blend yet, but I stopped by a Wal-Mart with an E-85 pump and it was .60 cents cheaper than regular unleaded per gallon! I filled up and realized I would have saved almost $12 bucks if I was putting in E-85. I’m not keen on the fact that the U.S. government is subsidizing the production and sale of E-85, but when I think of the alternative and dudes like Chavez trying to milk us for every dime, then I think again. Speaking of milk, the government subsidizes dairy producers as well as host of other agricultural production anyway. Might have to look at flex and alternative fuels in the future.

Hard to tell where the economy will be in 6-12 months, but I’m a sucker for a come-from-behind win. Like Dallas last night… (how about Romo to Witten in the final seconds!). And I cheer on the underdog… which is how the international media has portrayed the dollar over the past year. Somehow I don’t think things are going to be quite as bad as some folks predicted back in June. Personally I made some long moves last week to get ready for the next leg up. Have a great week.

     I’ll admit it… I’m tired of paying so much for fuel for the car.  What are you paying for gas these days?  We hit $2.90 to $3.15 in our area yesterday.  The cost of filling up the tank is really influencing our habits, shopping decisions, and the desire to drive our cars, and it’s very frustrating.  The cost to school districts and transportation companies for their diesel buses must be astronomical at these levels.  Equally the overland cost of transportation for the big rig companies and airlines.  Grocery prices have been rising this year for a host of reasons, and the transportation costs involved are going to continue being passed on to consumers.  Investor’s Business Daily wrote an editorial yesterday with a stark look at our present reality, An Energy Crisis of Our Own Making:

“Want to bring [fuel] prices down? The real problem behind soaring oil prices — a lack of supply — hasn’t been addressed at all. Today we have what economists call a “demand shock.” It’s a result of the greatest global economic boom in history — a result of more poor people in more countries being pulled out of poverty than ever, thanks to fast-growing economies and free trade.”

      The article talks about how so many of us, especially the political leaders, are all wrappred up in global warming rhetoric, and that it’s not doing much to help us deal with the economic costs of the lack of oil or high oil prices.   Can you imagine the inflationary costs and the impact on consumer spending if this continues for a great length of time?   I understand this will push us faster towards alternative technologies, more efficient cars, etc.  But at what cost to society?  Just think of the economic costs of the lack of oil, and the excess money going to pay for $90+ per barrel oil.  That money comes from everyone’s pockets, especially the government.  And that comes back around from our pockets too of course.   A case could be made for how much money is lost for good, or alternative causes, because we’re stuck paying for $90+ barrels of oil.  If we had more production and more supply, and $40-$60 per barrel of oil, those dollars could go a lot further across the economic spectrum.

     Think of the social programs that federal, state and local government could fund if they were not paying such high prices for fuel.  Think of the charitable causes a family- even our family might be able to fund if we didn’t have to spend so much on fuel costs.  Think of the consumer spending and opportunity costs invoved because fuel prices are so dang high.  Maybe that’s what frustrates me the most… it seems like such a waste of money to pay such high fuel prices when we could be paying less with more production. 

     In our family, we’ve had a little 3-cylinder car since 1999 that gets 45 mpg.  No air conditioning and not very comfortable… but we drive it quite a bit to save fuel costs.  It’s a Chevy Metro, formerly known as the Geo.  The manufacturer stopped making them around 2002 because they weren’t making enough money apparently, and people would pay more for nicer vehicles regardless of mileage. We love that little Metro for the utility it represents, and the sheer savings on fuel costs.

      Now we have the Smart Fortwo  coming out in 2008 in the U.S.  A cool little vehicle that proposes to get around 40+ mpg. 

     Not much better than our Metro, but it’s probably a lot nicer inside and out.  Sounds a lot safer too!  But I’ll still take the little Metro for now.  I think we paid all of $7200 for it in 1999 and it just runs and runs.  U.S. manufacturers are going to need to continue producing much more efficient vehicles- it’s in everyone’s economic interest.  But it’s still not going to solve the supply versus demand side of the equation unless we produce a lot more oil.

“As the chart shows, our failure to replace our depleted domestic oil reserves has left us with a serious mismatch of supply and demand. We use more oil each year, but supply less of it ourselves.  That makes us vulnerable. We send hundreds of billions of dollars overseas each year to the Middle East, Africa and South America, helping fund terrorism and prop up some nasty regimes.”  

     “As Sterling Burnett, a senior fellow at the National Center for Policy Analysis, notes, if we had started drilling in the Arctic National Wildlife Refuge in 1995 — when President Clinton nixed the idea — we’d be pumping millions more barrels today. Ditto if we had more vigorously pursued our offshore reserves.”

     The next few years will be very interesting.  I wonder if the public will reach a point of being fed up?  Or do we just accept the fact of paying higher fuel prices permanently?  I can’t help but wonder if, after we’re well on the road to alternative energy use, and global warming becomes a household name with children’s books telling all about it… what if oil prices are still just as high or higher and we still have high demand?  What if the only thing that will reduce oil prices, and the cost to society for the next 10-20 years is more production?   Will we ever get there?  Maybe someone will invent a killer new technology that will negate the need for oil all together.  That would change everything.

My goodness, fuel prices are totally absurd!  There, I’ve said it… I’m complaining online about gas prices.  I’m half ashamed, especially because after this week’s storms and tornadoes, there are whole towns of people without homes, let alone vehicles to drive.  My heart goes out to them, and we can only do so much to help them rebuild their lives and communities.  Life within the nation still goes on… there is tragedy every day locally and nationally, and yet we must go on, doing the best we can in our own lives.

But I think fuel prices are a tragedy as well.  What makes me frustrated, even angry perhaps, is that we have the technology, the resources and the ability to have plenty of oil and gas… if we really wanted to.  The supply and demand issue is real, but is a house of cards that we built over many decades.  The fact that a new oil refinery has not been built in this nation in 20-30 years is staggering.  But the congressional leadership has thus far lacked the political will to make the decisions necessary to change anything.  I’m all for environmental stewardship and conservation of our natural resources.  I strongly believe in protecting the environment and doing what we can to lessen our impact on the world in which we live.  But at some point the very real human and economic needs must become a paramount concern for how we use our natural resources.  We can balance sustainable resource use with environmental priorities.  They are not mutually exclusive.  And yes, we can focus on renewable energy and further research to lessen our need and dependence upon oil.  But the fact remains that world populations are expanding, especially in Asia.  We drive millions of vehicles at home and internationally- and the demand for oil will only increase.  I believe the research that shows the world’s supply of oil is actually quite abundant.  The limitations we face are finding, gathering and refining that oil to support the nation’s needs.

What can we do?  We can open up key areas off the nation’s coasts to offshore exploration and drilling, as well as the Alaskan oil fields.  What are we waiting for?  It takes years of research and investment for a major oil company to find and begin production of a new oil field.  But our political leaders have not made it any easier.  And no U.S. oil company has had any incentive to try and build a new refinery- the environmental regulations challenge their efforts at every turn.  Do I blame the oil companies for high fuel prices?  No, not really.  It’s too easy to place blame on the very companies that make it possible for us to use the fuel we need.  They compete with the world’s demand to find and bring oil to our nation’s shores.  I place blame on OPEC and those near third-world  nation’s leaders who are laughing all the way to the bank while we pay through our nose to buy fuel.  I also blame myself.  I haven’t done anything to voice my opinion with my legislators, at least not recently.  And those whom we have elected have done little to change the situation.  There’s also a lot of speculation in the energy markets… in an earlier post I blamed Enron for being an example of how a company, or a cartel, can yank resource use around to make billions of dollars of profit.  I don’t believe U.S. companies are doing that at the expense of the American consumer, but I’m sure there will be more congressional hearings on that issue.  Maybe a little out there from the conspiracy theory viewpoint.  But there is a lot of money in the energy markets and that plays a role.   I don’t know when it’s going to get better, but it doesn’t look like anytime soon.  We’re going to feel these prices at the grocery store and everywhere else that shipping costs must be reflected in the prices we pay for goods.  It’s time to really do something… to bring the nation’s leadership together with the oil companies if necessary and figure out a strategic approach to providing more oil and energy resource needs for the U.S. economy.  At some point the nation’s economic needs cross the boundary of security needs. We’re getting there pretty dang quick.   Some research shows that Americans spend less on fuel costs than we did many years ago, as a percentage of total household costs, etc.  But I’m not sure I believe that, especially with the amount of commuting we do, and the number of cars most households have these days.  Just ask the the person in the car next to you at the gas pump how they feel about it… I got an earful the other day.