by Calculated Risk on 9/12/2005 06:48:00 PM

A Reuters article, "Oil sinks back near $63", quotes Gary Ross, chief executive of U.S. energy consultancy PIRA Energy, saying:

"U.S. gasoline data over the next few weeks will show the effect of high oil prices on demand."

His statement is inaccurate. Gasoline data will show the effect of high gasoline prices on demand. Even with spot oil prices over $60, gasoline demand was still robust until Hurricane Katrina shut down several major refineries causing a supply shock for refined products.

The Financial Times makes a similar mistake:

"One factor driving up [crude oil] prices has been the inability of consuming countries to increase refinement capacity."

It is very possible that limitations on refining heavy and/or sour crude have increased the spread between different grades of crude (see Sweet and Sour Crude). However, a general constraint on refining capacity would lead to lower crude prices, not "drive" up the price of crude oil.

This confusion seems to be widespread in the financial media.

by Calculated Risk on 9/12/2005 01:11:00 AM

My latest post on Angry Bear is up: Gasoline: A Time for Caution.

And here is an interesting follow on article: Could Katrina kill the SUV?

Even before Hurricane Katrina tore through the southern United States, hampering a big chunk of the US oil industry, consumers were having second thoughts about gas-guzzling sport utility vehicles.

Katrina could now hasten the demise of the SUV, at least in its current guise, after years in which it has ruled the roost over the world's biggest auto market, analysts believe.
...
"Potentially, Katrina could signal the death knell of the SUV in as much as consumers are going to find themselves once burned, twice shy to buy such vehicles," Wachovia economist Jason Schenker said.

"High gas prices and the perceived fragility of the US energy sector are all likely to weigh on consumers' choices for years," he said.

Sales of big SUVs dropped dramatically in August, hurting both American and Japanese manufacturers, which have been trying to edge into the segment over the past five years

The headline is an exaggeration, but the automobile industry was in trouble before the hurricane and it is very possible that consumer preferences will change in response to higher gas prices (just like in the early '80s). The consequences for the automobile manufacturers and the US economy might be significant.

Best to all.

by Calculated Risk on 9/10/2005 12:25:00 PM

After a week without news, hopefully I return with a clear head and a fresh look at the world. But first a few photos of Yellowstone ...


Click on photos for larger image.

The Yellowstone river winds its way through the Hayden valley in early September.

The wildlife viewing was excellent. Herds of bison were ubiquitous. We encountered several bull elk herding their harems through the forest. We saw wolves in the Lamar Valley, Pronghorn antelope, moose, coyote, trumpeter swan, mule deer and more. Did I mention the Bison were everywhere?

Examining a large petrified Redwood tree stump on Specimen Ridge.

This tree was buried some 50 million years ago by volcanic deposits and mudflows during a volcanic eruption. There are two smaller petrified Redwood trees just below the large Redwood (one in the bright sun, one in the shade). The view and the numerous specimens on the ridge (hence the name) made the steep climb worth the effort.


This Great Gray Owl greeted us on a short walk to the Natural Bridge (a small natural arch near Lake Yellowstone).

The park is incredible. The burn areas from the '88 fire are filling in with new growth and many of the young Lodgepole Pines, in the better growing areas, are 10 to 15 feet tall. I heartily recommend a September visit to Yellowstone.

Best to all and its great to be home!

by Calculated Risk on 9/02/2005 04:28:00 PM

NOTE: I will be out of town over the next week (leaving tonight). I hope everyone has a good week ... and my thoughts are with the victims of Hurricane Katrina.

The AP reports: Nations to Release 60M Barrels of Oil, Gas

Twenty-six countries in an international energy consortium will release more than 60 million barrels of crude oil and gasoline to relieve the energy crunch caused by Hurricane Katrina in the United States.
...
[Energy Secretary Samuel Bodman] said he had received indications from other IEA members that a significant part of their portion would be refined products, mostly gasoline, which will be released onto global markets.

"We have made it known that we are facing shortfalls in available supplies of refined products in our country as a consequence of this storm," Bodman said, expressing confidence the gasoline will find its way to the United States where prices are expected to remain high.

Already there are 20 ships carrying gasoline from commercial foreign stocks to the United States, he said. The supplies from government stocks would be in addition.

This is a short term (30 day) fix since these countries are drawing down reserves to help the US. OCT Crude Oil was down to $67.57 per barrel and unleaded gasoline (OCT) down to $2.18 per gallon on the news.

by Calculated Risk on 9/02/2005 03:06:00 PM

As of Sep 1, 2005 our National Debt is:

$7,929,658,283,890.28 (almost $8 Trillion)

As of Aug 1, 2004, our National Debt was:

$7,354,611,427,274.47

SOURCE: US Treasury.


Click on graph for larger image.

For comparison Year over Year Increase:
For Fiscal 2004 (End Sept 30, 2004): $596 Billion
For Jan 1, 2004 to Jan 1, 2005: $609.8 Billion
For Feb 1, 2004 to Feb 1, 2005: $618.6 Billion
For Mar 1, 2004 to Mar 1, 2005: $635.9 Billion
For Apr 1, 2004 to Apr 1, 2005: $660.9 Billion
For May 1, 2004 to May 1, 2005: $648.8 Billion
For Jun 1, 2004 to Jun 1, 2005: $588.0 Billion
For Jul 1, 2004 to Jul 1, 2005: $581.2 Billion
For Aug 1, 2004 to Aug 1, 2005: $566.2 Billion
For Sep 1, 2004 to Sep 1, 2005: $575.0 Billion

The debt situtation worsened slightly in August and fiscal 2005 has a chance to see the worst annual increase in National Debt ever. The current record annual increase in the National Debt is $596 Billion for fiscal '04.

So far, despite the much ballyhooed "budget improvement", the US keeps accumulating debt at about the same pace as last year.

by Calculated Risk on 9/02/2005 09:54:00 AM

From the AP:

In Friday's report, U.S. employers added 169,000 jobs in August, reflecting increased employment in industries, including construction, professional and business services, health care and education, and financial activities. But manufacturers shed jobs for the third straight month, reflecting the industry's sometimes bumpy road to recovery from the 2001 recession.

Also encouraging was that payroll gains were revised up for both June and July. Employers in July added 242,000 jobs, an improvement from the government's initial estimate of 207,000 net job gains. For June, 175,000 jobs were added, up from a previous estimate of a 166,000 jobs gain.

The payroll gain of 169,000 reported for August was less than the 190,000 new jobs some economists were forecasting before the release of the report. Economists were predicting the unemployment would hold steady at July's 5 percent rate.

Professional and business services added 29,000 jobs in August. Financial companies added 15,000. Education and health services expanded employment by 43,000. Leisure and hospitality added 34,000 jobs. Retailers added close to 12,000 during the month. Construction companies boosted payrolls by 25,000.

But factories cut another 14,000 jobs in August. Auto makers accounted for the biggest chunk of those job losses.

The labor market is the one part of the economy that has had difficulty getting back to full throttle after the 2001 recession.

Jobseekers still face challenges. The report showed that the average time that the 7.4 million unemployed spent searching for work in August was 18.9 weeks, up from 17.6 weeks in July.

Those who do have jobs are seeing wages rising. Average weekly earnings climbed to $544.59 in August, up from $543.92 in July. The figures aren't adjusted for inflation.

Numbers are before the impact of Hurricane Katrina.

Bush's first term, with a net loss of 759K private sector jobs (a gain of 119K total jobs), has to be considered disappointing. For Bush's 2nd term, anything less than 6.8 Million net jobs will have to be considered poor. And anything above 10 million net jobs as excellent. Of course, in additional to the number of jobs, the quality of the jobs and real wage increases are also important measures.

For the quantity of jobs, the following graph provides a measurement tool for job growth during Bush's 2nd term.


Click on graph for larger image.

The blue line is for 10 million jobs created during Bush's 2nd term; the purple line for 6.8 million jobs. The insert shows net job creation for the first 7 months of the 2nd term - currently just below the blue line.

by Calculated Risk on 9/01/2005 02:41:00 PM

From Reuters: Storm may shut refineries for months

The government warned on Thursday that some U.S. refineries shut by Hurricane Katrina may not resume processing oil for several months ...
...
"Some refineries likely (will be) able to restart their operations within the next 1 to 2 weeks, while others will likely be down for a more extended period, possibly several months," the Energy Information Administration said.

The Energy Department's analytical arm said nine major oil refineries in Louisiana and Mississippi remained shut from the hurricane. Those refineries account for about 11 percent of total U.S. refining capacity.

"Unlike 2004's Hurricane Ivan, which affected oil production facilities and had a lasting impact on crude oil production in the Gulf of Mexico, it appears that Hurricane Katrina may have a more lasting impact on refinery production and the distribution system," the EIA said in its most recent update on the effects of the hurricane on the energy sector.

This is a temporary refined products supply shock. See Dr. Thoma's overview of AD vs. AS shocks.

Some key points: Oil is a global market. The loss of production in the GOM will be felt worldwide. Gasoline is much more of a domestic market (and regional), though some refined gasoline is imported - so there is a global aspect.

A Supply Shock will force the reduction in consumption of refined products through higher prices (Rationing hasn't been mentioned yet). It is possible that this reduction in demand will lead to lower crude oil prices even though gasoline and other refined products will remain elevated.

Just musing about possibilities ...

by Calculated Risk on 9/01/2005 10:53:00 AM

UPDATE: Kash looks at the numbers: House Prices

The Office of Federal Housing Oversight (OFHEO) reports:

LARGEST U.S. HOUSE PRICE INCREASES IN MORE THAN 25 YEARS
OFHEO House Price Index Shows Annual Rise of 13.4 Percent

WASHINGTON, D.C. – Average U.S. home prices increased 13.43 percent from the second quarter of 2004 through the second quarter of 2005. Appreciation for the most recent quarter was 3.20 percent, or an annualized rate of 12.8 percent. The new data represent the largest four-quarter increase since the second quarter of 1979. The figures were released today by OFHEO Acting Director Stephen A. Blumenthal, as part of the House Price Index (HPI), a quarterly report analyzing housing price appreciation trends.

"There is no evidence here of prices topping out," said OFHEO Chief Economist Patrick Lawler. "On the contrary, house price inflation continues to accelerate, as some areas that have experienced relatively slow appreciation are picking up steam."

House prices grew considerably faster over the past year than did prices of non-housing goods and services reflected in the Consumer Price Index. House prices rose 13.4 percent, while prices of other goods and services rose only 3.1 percent.

More to come.

by Calculated Risk on 8/31/2005 06:12:00 PM

Even before the devastation of hurricane Katrina, the US economy was apparently headed for a significant slowdown and possible recession. According to a survey of CFOs completed on August 28th (before Katrina): Housing, Fuel Are Top CFO Concerns

In the four years of the survey, this is the first time that CFOs with growing pessimism outnumbered CFOs with growing optimism. Indeed, the level of optimism is down sharply from last quarter's 40 percent and is strikingly lower than last year's 72 percent.

"This is the greatest increase in pessimism that we have seen," says Don Durfee, research editor of CFO magazine. "We’ve found that this optimism index predicts future economic growth quite well. In a situation like this, where the growth in pessimism outweighs the growth in optimism, we expect to see a slowdown in economic growth."

Emphasis added. And the most recent numbers have not looked good:

Macroblog: Not The Most Bullish Day For Economic News

The Big Picture: PMI, GDP stink up the joint

And here is how Briefing.com described the Chicago PMI report (with chart):

• An unbelievable plunge to 49.2 in August Chicago PMI index (-14.3 pts).
  
  Key Factors
  
• Record sized plunge leaves index in a contractionary sub 50 level -- the first since April '03 after reaching a 17 yr high in March.
• New orders (30% weight) plunged an astounding 23 points to 46.5 -- presumably off the highs in oil prices.
• Production fell to 56.2 from a nose bleed 70.5 in July as it followed orders.
• Employment fell in line to 51.7, March stood at a high 66.
• Prices paid rose to just 62.9 and doesn't reflect the pricing fear we are assuming caused the orders plunge.

So Katrina impacted an already fragile US economy. Dr. Hamilton notes this while discussing the energy related economic impact of Katrina: Day 2:

... this event did not arrive out of the blue. Instead, it came in an environment in which there was already considerable anxiety about gas prices and sound basis for worrying about a possible recession even if Katrina had done no harm.

Could this be enough to tip the whole economic cart over? I'm not certain that it will. But it would seem foolish to deny the very real possibility that it could.

And Kash makes a similar observation - "I’ve been a bit worried about which way animal spirits were heading in the US" before Katrina struck - he writes on Katrina and Psychology over on Angry Bear:

Now add Katrina. ... I think that the current situation contains the seeds for such a shift in sentiment. My personal odds for a recession in 2006 have just gone up, thanks to Katrina.

UPDATE: Dr. Polley adds: Katrina and the probability of recession

"I am reluctant to speculate too much too soon about a recession. It's just too early. But all in all, the economics corner of the blogosphere has been (as evidenced by the links here) very reasoned in its assessment of the situation. My take is closest to Hamilton's. It would indeed be foolish to underestimate the possibility that this could be the straw that breaks the camel's back.
...
Of course, that doesn't mean a recession is inevitable. ... I think it is safe to say, however, that this is a very critical moment for the economy. It could swing either way. If we pass this hurdle, I think it bodes well for the future of the recovery."

OTOH, the Ten Year bond has rallied and the yield has dropped from 4.4% to just under 4.1% over the last few weeks. This will probably lead to lower mortgage rates and could possibly boost equity extraction and support the housing market. Tomorrow the OFHEO House Price Index will be released and I believe it will show stunning widespread gains in house prices and that might help with confidence. But I think the housing boom is almost over, even with slightly lower mortgage rates.

by Calculated Risk on 8/31/2005 03:37:00 PM

After and before photos of the New Orleans area:


Click on photo from larger image.



August 30, 2005.


Photo from NASA Earth Observatory.

August 27, 2005.