patrick.net

^Wonder how well folks remember this:

http://en.wikipedia.org/wiki/1969_Santa_Barbara_oil_spill

and some crazy photos of the spill:

http://marketplace.publicradio.org/standard/display/slideshow.php?ftr_id=76296&slide=1

Oh yeah, the avg price for a gallon of gas today in California (gasbuddy) is $4.15.

There has to be a point at which there's pushback. Americans are amazingly stubborn on having cheap gas compared to many other countries. Personally I paid a little under $4.00 at Costco the other day and don't care. I looked at my spreadsheet and in the 11 months since I started that sheet as best as I recall it was $892 of gasoline. I may pull up my spreadsheet later at home and pull some more numbers. I'm kind of curious what most people spend?

Vicente says

There has to be a point at which there’s pushback.

You nailed it... but WHEN will we reach this point?

Vicente says

I’m kind of curious what most people spend?

I haven't been driving much lately, but I'd say normally ~ $25-35 every week. So about $1300-1800 a year... and probably more on the low end of that range.

Vicente says

I’m kind of curious what most people spend?

I drive a Diesel, and put B5 into it at about $4.33/gal. I don’t drive very much, I like my walk to work, and the nanny ends up driving more than I do.

I end up putting gas in about once a month, sometimes only half a tank. Probably I average around $35-40/month or $420-480 a year at current prices.

For several reasons I think that we should be paying a lot more for gas than we do, and the increases in price don’t really bother me.

Here in the San Francisco Bay Area, we have $4 gas and then some. :-(

And so it begins, here's something the Federal press wont tell you.

http://hosted.ap.org/dynamic/stories/U/US_GAS_SALES?SITE=KLIF&SECTION=HOME&TEMPLATE=DEFAULT

But $100 is dead before it even started. WITH the middle east turmoil and the ever persistent threat of Godzilla springing up from the south Pacific.

We American people are just too Goddamn stupid to pay $5.00 for gas. We just don't get, how that will equate to ending our dependance on foreign Oil, what when the alternative is driving a $40,000.00 car that looks like a AMC Pacer. Yeah we're just to damn retarded to get that correlation.

Maybe one day, there's always hope isn't there?

I'm already paying $4/gallon. Looking forward to driving an electric car soon.

Oil is down steeply again today (bloomberg):

Crude Oil Plunges as Higher Prices Are Forecast to Curb Growth
http://www.bloomberg.com/news/2011-04-12/crude-oil-declines-the-most-in-almost-five-months-on-japan-crisis-economy.html

Anyway, the price of gas is sticky and will be elevated/elevating for a while... From the latimes:

Gasoline prices continue climb
http://www.latimes.com/business/la-fi-gas-prices-20110412,0,2458026.story

For debate...

Potential headwinds: IMF report, Q1 GDP report, GS stops buy recommendation, consumer sentiment, economic slowdown in Japan

Potential tailwinds: Libya ceasefire isn't holding up (again), Yemen/Bahrain ongoing, QE2 doesn't end 'till June, total oil and gasoline inventories declining in US (EIA), OPEC production capacity (?), increased need for oil to replace lost nuclear power capacity in Japan

leoj707 says

For several reasons I think that we should be paying a lot more for gas than we do, and the increases in price don’t really bother me.

It's really nice to have such a profound voice of reason on this site. Glad you're here leoj.

I saw gas over $4/gallon in Bethesda, MD last week.
Of course it's much cheaper than that on other parts of the state.

Oil back up again today (bloomberg):

Crude Oil Advances as U.S. Gasoline Inventories Drop the Most in 12 Years
http://www.bloomberg.com/news/2011-04-13/crude-oil-rises-for-the-first-time-in-three-days-before-u-s-supply-report.html

According to the article, US gas stockpiles are down, but (commercial crude?) oil supplies are up slightly.

Oil prices are likely to remain “high” as the impact on fuel demand from this year’s rally will probably be limited, according to Bank of America Merrill Lynch. Prices may temporarily exceed $140 a barrel in the next three months as consumption expands “rapidly” and armed conflict curbs supplies from Libya, according to the Merrill report dated yesterday.

Guess that guy bought AFTER Goldman pushed the price down over the past couple of days...

And gas is up too (gasbuddy):

$3.79/gal national average

Up we go again (zerohedge):

Crude Now Higher Than At Goldman Downgrade
http://www.zerohedge.com/article/crude-now-higher-goldman-downgrade

But this is good news, right (bloomberg)?

Crude Oil Advances as Increasing Equities Bolster Optimism in the Economy
http://www.bloomberg.com/news/2011-04-20/crude-oil-advances-as-increasing-equities-bolster-optimism-in-the-economy.html

“The stock market is a leading economic indicator, so it shouldn’t be a surprise that oil is up as well,” said Adam Sieminski, chief energy economist at Deutsche Bank AG in Washington. “If the stock market is higher, there’s a good chance that oil demand will be up as well.”

but wait...

Gasoline inventories dropped 1.58 million barrels to 208.1 million, the lowest level since the week ended Nov. 12, the report showed. Stockpiles were forecast to decline by 1.75 million barrels, according to the survey. Demand for the motor fuel was little changed at 8.99 million barrels a day over the past four weeks, 1.8 percent lower than a year ago.

“The market is rising on perceptions about the strength of demand, which are based on the stock market,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “This distracts attention from the actual strength of demand. Gasoline consumption remains lower than a year ago.”

So an increasing stock market, drives *perceived demand* for gas/oil, which drives actual prices for gas/oil up, even though *actual* demand for gas has been flat for a month. Can't see how anything could possibly go wrong with this sort of deal... move along, nothing to see here!

Oh yeah... the national avg for gas is $3.82 today (gasbuddy):

For what it's worth...

http://www.japantoday.com/category/world/view/costly-gasoline-causing-problems-for-obama

How much of this is because of world demand (incl. China), how much is because of lack of refineries in the US and how much is because of QE 2?

American in Japan says

How much of this is because of world demand (incl. China),

That's it right there. Flat supplies. Surging demand (china alone added 15M *NET* automobiles last year). This is first few weeks of Econ 101.

The whole QE2 causation is just a reality bizarre meme that somehow caught on, but has no basis in reality. The only part it plays is a somewhat weaker dollar, so the price of oil as measured in dollars goes up a some. But the yen has gotten STRONGER as the dollar got weaker in comparison. So please... tell us all about the cheap gas you have over there in Japan because of a weak dollar?

I assume you are being sarcastic, since gasoline here costs around as much in New Zealand. as I calculate about $6.70-$7.00/gal.

American in Japan says

assume you are being sarcastic, since gasoline here costs around as much in New Zealand. as I calculate about $6.70-$7.00/gal.

The Libs here live in a fantasy world where $10 a gallon gas on the streets of America translate to 5 cents a pound rice in the third world countries, and there are teams of Magical elves in think tanks around the Globe working out the details of a utopian means of transportation, that will allow global commerce and the flow of food unimpeded.

I am curios though, if you guys that thinks Ameirca's biggest problem today is our "Dependence on foreign Oil", just what diminished threat do you expect from the Opec countries, when their only means of income is taken off the table. OK so there still will be a need for Oil to make plastics, but two things. First with out a demand for gasoline, the demand will be less than half. These countries GDP will take a big hit.
What will we do with the petroleum bi-product of the refining process of the crude. Dump it in the Ocean?

MarkInSF says

The whole QE2 causation is just a reality bizarre meme that somehow caught on, but has no basis in reality.

This has come up before Mark, and you said:

MarkInSF says

Since QE2 is the purchase of long dated treasury securities, the money went and is going to the previous owners of those securities.

and...

MarkInSF says

Open Market Operations. You got a treasury bond to sell? Put in a bid, and the Fed will buy if you offer the lowest price. It’s really not that hard. One treasury bond is just like another.

Doesn't this mean that this cash is freed for investment elsewhere, like emerging markets and speculation in the options and futures markets?

MarkInSF says

Money can’t really go “into” commodities either. Here there isn’t even a profit to be made, since a commodity is not a productive asset like a stock - it does’t generate profits like a company does, so there is no reason for a commodity to demand a higher price based on interest rates.

If you’re not going to actually take delivery of a commodity, essentially all you’re doing is posting some money as collateral, and making a bet that the price will rise before your contract is due. If QE2 has any effect on commodities, it rests upon the assumption that low interest rates encourage more risk taking. And they do, to some extent. But risk taking is still risk taking, and doesn’t make profits any more likely, or losses less likely. Borrowing money at 0.1% to play the horse track is more appealing than borrowing at 10%, but it’s still betting on horses.[Emphasis added]

It seems like your argument here is that the folks that sell their long-dated treasurys to the fed STILL need to re-invest that money in a 'safe', interest or dividend paying investment. So they would NOT want to buy into risky commodities-based investments. Is this correct?

American in Japan says

I assume you are being sarcastic, since gasoline here costs around as much in New Zealand. as I calculate about $6.70-$7.00/gal.

Exactly. Which is why blaming QE2 does not make sense. The only way QE2 affects oil prices is by making the dollar somewhat weaker, so oil gets more expensive for Americans. And yet it's expensive all over the world.

MarkInSF says

Which is why blaming QE2 does not make sense. The only way QE2 affects oil prices is by making the dollar somewhat weaker, so oil gets more expensive for Americans.

A couple of quotes from charles hugh smith (oftwominds):
http://www.oftwominds.com/blogapril11/anatomy-of-crisis4-11.html

Another conventional view of QE--that it isn't "injecting liquidity" because it's simply an asset swap-- The end of QE and what it means for the market--misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation, which is certainly higher than officially recognized. It’s this flow of cash that’s driving up commodity costs.

If that flow of new cash ceases (QE ends), then the risk trade (and Treasury bonds) both lose a key support.[Emphasis added

And...

The key dynamic is the linkage of the renminbi (yuan) and the U.S. dollar. When the dollar tanks, oil rises when priced in dollars--and thus it also rises when priced in yuan. Thus the decline of the dollar and the consequent rise in commodities has directly fueled inflation in China, which is more dependent on a per capita basis on materials than the U.S.

China's policy-makers have exacerbated inflation by excessive money creation and lending by their own banks, but that alone is not sufficient cause for gasoline/petrol to cost as much in China as it does in the U.S. Oil is the foundation for petrochemicals, fertilizers, transport, plastics, etc., so the rise of oil driven by dollar depreciation is a driver of inflation throughout the Chinese economy.

And finally:

China appears to be in the grip of a classic wage-price spiral inflation. Minimum wages are leaping by 25%, prices of many food items are doubling--this self-reinforcing dynamic is clearly visible in China.

Sure, commodities have been on the rise for 10 yrs or more. Their appreciation recently (since QE2) seems to be accelerating, and global demand, although up, may very well be transitory.

terriDeaner says

It seems like your argument here is that the folks that sell their long-dated treasurys to the fed STILL need to re-invest that money in a ’safe’, interest or dividend paying investment. So they would NOT want to buy into risky commodities-based investments. Is this correct?

Essentially yes. If you're holding treasuries, it's because you want a solid safe investment. If you're selling it you're likely a bank or a money or pension fund selling to pay out cash to somebody. Say you've got a $1M treasury bond for sale. There are two possibilities:

1) A market participant buys it for $900K, implying a X% interest rate.
2) The fed offers more than the market, and buys it for $950K, implying a Y% interest rate where Y>X.

You've not got $950K instead of $900K. So what? Why would you be more likely to speculate with $950K than you would with $900K?

If you're considering rolling the funds into a new treasury bill vs other investments, the yields on stocks and real estate look more attractive, so the prices of those asset prices would likely be pushed up.

But for speculative bets? Lower long term rates doesn't make them more attractive, since it has no rate of return. And all commodities speculation is leveraged with overnight borrowing rates, and they were already at 0%.

Anyway, just because you buy an August contract for oil doesn't mean you're going to be able to sell for more than you bought it for come August, when you must sell to an actual oil consumer. There a lot of blabber about speculators being responsible for high oil prices, and Obama has just told the DOJ to investigate. And guess what? They're going to find out, just like they did in 2008, that it's not the speculators.

MarkInSF says

You’ve not got $950K instead of $900K. So what? Why would you be more likely to speculate with $950K than you would with $900K?

Well, you may not want to speculate with the $900K, but you may want to speculate with that extra 50K QE2 'loan', which you could easily leverage out to 500K. And since short-term treasurys pay next to nothing, stocks and commodities would be good choices for short-term investments. I think this scenario is particularly relevant for investors (like say, calPERS) that are obliged to chase high rates-of-return that are unobtainable through investment in today's market conventional, 'safe' investments.

MarkInSF says

Anyway, just because you buy an August contract for oil doesn’t mean you’re going to be able to sell for more than you bought it for come August, when you must sell to an actual oil consumer.

True, but you could cash out and sell the contract to some other schlep before August, right? And pay out or plow the proceeds back into whatever looks good at that point.

MarkInSF says

Say you’ve got a $1M treasury bond for sale. There are two possibilities:

1) A market participant buys it for $900K, implying a X% interest rate.
2) The fed offers more than the market, and buys it for $950K, implying a Y% interest rate where Y>X.

This looks like a typo... Wouldn't the interest rate comparison be the other way around... X>Y since the price paid in case 1 is lower? Otherwise the fed would be driving interest rates UP by purchasing treasurys at a higher price.

terriDeaner says

The end of QE and what it means for the market–misses the point, which is that boosting bank reserves (what QE accomplishes) enables additional leveraged 20-to-1 (or more) lending. QE also keeps U.S. interest rates near-zero, which encourages a carry-trade of dollars flowing around the globe seeking higher returns and offsets to global inflation

Sure, it "enables" more lending, but that lending simply is not happening because the economy is already debt saturated.

And as for the carry trade, overnight rates were already at 0% before QE2, and QE1 for that matter. Carry trades and speculative leverage is done almost exclusively with overnight borrowing.

The whole reason it's called QE is that it's monetary policy when short term rates are already 0%.

terriDeaner says

This looks like a typo…

Sorry, yeah. I mean X>Y.

MarkInSF says

Sure, it “enables” more lending, but that lending simply is not happening because the economy is already debt saturated.

How is this amount of lending measured?

MarkInSF says

And as for the carry trade, overnight rates were already at 0% before QE2, and QE1 for that matter. Carry trades and speculative leverage is done almost exclusively with overnight borrowing.

I think his argument is simply that the loose exchange environment is being maintained by QE2 and QE1, not that it originated with them.

terriDeaner says

How is this amount of lending measured?

I go by the Z1:

http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf

Credit growth isn't even keeping up with GDP growth + inflation. And the lending is mostly going to government debt purchases, not to businesses or households, and the financial sector continues to DE-leverage. If QE has had an effect on credit growth or leverage - other than keeping it from collapsing, I don't know where the evidence is.

Vicente says

There has to be a point at which there’s pushback. Americans are amazingly stubborn on having cheap gas compared to many other countries. Personally I paid a little under $4.00 at Costco the other day and don’t care. I looked at my spreadsheet and in the 11 months since I started that sheet as best as I recall it was $892 of gasoline. I may pull up my spreadsheet later at home and pull some more numbers. I’m kind of curious what most people spend?
“Eagles are dandified vultures” - Teddy Roosevelt

How is Costco gas? I'm a member, but been told many times by others that Costco and Arco gas is bad which is why it is cheaper. But I don't really have ways to verify any claims of that nature.

MarkInSF says

I go by the Z1:

Thanks Mark.

Just paid $4.22 the other day.

From zerohedge:

Guest Post: Tracking The Next Gasoline Induced Recession
http://www.zerohedge.com/article/guest-post-tracking-next-gasoline-induced-recession

So, what would it take in order for this spike not to lead to an economic recession. First, the average American would need to go back to work with an increase in wages to knock the percentage be eaten up by higher food and energy prices back down to the 18% level. Furthermore, the banks would need to open back up the tap to allow consumers to have access to credit. This sounds easy enough until you realize that you just opened Pandora's box as we have now just instilled the three legs to hyperinflation - commodity inflation, wage inflation and velocity of money. Now the Fed has to raising interest rates to battle rising inflationary pressures and the economy slows into recession as a result of tightening monetary policy. This is why the Fed is trapped in a box and cannot, for very long, withdraw support from the economy and the financial markets - it is a game that will end badly at some point in the future.

The trap is set and there is an increasing probability that by the end of this year, or early next, we may be writing the next chapter in American recessions.

Up to nearly $3.92/gal national avg.(gasbuddy):

>"Well, you may not want to speculate with the $900K, but you may want to speculate with that extra 50K QE2 ‘loan’, which you could easily leverage out to 500K."

Interesting... options then?

Just out of curiosity, what was the price of gas when President Obama took office?

American in Japan says

>”Well, you may not want to speculate with the $900K, but you may want to speculate with that extra 50K QE2 ‘loan’, which you could easily leverage out to 500K.”

Interesting… options then?

Possibly. I'm still not sure EXACTLY how this 'hot money' gets to the global options or futures markets, though, for leveraged speculation. As Mark pointed out above, the Fed tracks borrowing on its 'z1' flow of funds report. And although total domestic debt has been growing, not all components are contributing to debt growth (e.g., business, state and local gov., fed gov is increasing but financial sector debt is declining). And furthermore, it seems like you should be able to model (to some degree) how much this added borrowing would translate into commodities price increases. So I don't know if the measured levels of borrowing support current price levels, aside from actual increases in demand due to supply constraints (oil and gas, in particular).

http://www.federalreserve.gov/releases/z1/current/z1r-2.pdf

That said, I suspect that these books are legally 'cooked' to some extent, and that is it possible that QE2-origin money used for speculating (as in my example) may not be tracked by the Fed because it is effectively 'off the books'.

So according to the flow of funds summary stat sheet:
http://www.federalreserve.gov/releases/z1/Current/z1r-1.pdf

Explanatory notes for tables D.1, D.2, and D.3.

Credit market debt consists of debt securities,
mortgages, bank loans, commercial paper, consumer
credit, U.S. government loans, and other loans and
advances; it excludes trade debt, loans for the
purpose of carrying securities, and funds raised from
equity sources. This definition is consistent with the
presentation of credit market borrowing and lending
on tables F.1 through F.4. Net lending (+) or net
borrowing (-) on the individual sector tables and the
matrix is defined as net acquisition of financial assets
less net increase in liabilities.[Emphasis added]

I think it might be possible, as CHS suggests, that the 'hot money' might be transferred to foreign banks from which funds could be borrowed and not be tracked by the Fed, unless the foreign-source bank borrowed FROM US banks (which is debt that the Fed does track, and this debt did increase Q3-Q4 2010). But then you get into issues of exchange rates and purchase currencies, which I don't have a very good handle on... Anyhow, that's my current model of what's going on as far as the speculative component of commodities investment that is contributing to the accelerated upswing in global commodities prices.

RayAmerica says

Just out of curiosity, what was the price of gas when President Obama took office?

Check out the gas price chart at the top of the post. For comparison, here's a chart that shows the nominal and inflation adjusted price of oil over a longer time period than in the original post ( http://inflationdata.com/inflation/images/charts/Oil/Inflation_Adj_Oil_Prices_Chart.htm ):

The price of gas, of course, tracks closely with the price of oil. And here is a good graphic of who was in charge over that time period (http://conservativeobjectivism.com/NationalDebt/PartyPoliticalPower.JPG):

'power' is plotted by adding +1 to the dems if they hold the house, senate or presidency, or -1 to the repubs. For example in 1991, the dems controlled both houses of congress (+2), but the repubs controlled the presidency (-1).

Here's a more detailed graph from a different source (http://upload.wikimedia.org/wikipedia/commons/8/85/Congress-Graph.png ):

So gas prices have actually dropped over the past few days to about $3.94/gal national average (gasbuddy.com):

No doubt due, in part, to last week's commodity crash related to margin calls and economic indicators of reduced demand. Brent is back down to $109/bbl and WTI is at $ 97/bbl, according to bloomberg.com.

But will we see a resurgence in oil and gas prices later this month? After all, Memorial day weekend, considered by many to be the start of the summer driving season in the US, is only a few weeks off.