Friday, May 2, 2008

Economic Recovery - a quick Q&A

(5/2/08) In my opinion, we're about 3 months from the start of a noticeable recovery.

Here's my theory:

What the heck is causing gas to be so expensive?
Nope, it's not Exxon and Shell raping us with insane profit margins. Yes, the profit dollar numbers are huge, but it represents only 7.5%-9% of their revenue. 9% net profit is not at all excessive. Compare it to Microsoft's if you don't believe me.

So if it's not them, who is it? Is it the Arabs withholding supply?
Nope. Of our imported oil, only one of the top 5 countries is Arab; Saudi Arabia at #2. Canada is #1, and Mexico, Nigeria, and Venezuela round out the top 5; which account for 70% or so of our total imports. It's not a supply issue.

Is it a rising demand issue?
Nope. 9 straight months of diminishing demand. Are YOU doing more driving now that gas is $3.60?

So what is it?
Well, a small part is that we're stockpiling the Strategic Petroleum Reserve, buying about 700 million barrels to top it off, and building more. This is good long term thinking. But the big offender?

THE OIL COMMODITIES MARKET.

It's speculators, who are buying up oil futures as a hedge against inflation.

Where does the inflation come from?
A weakened dollar.

Why is the dollar weak?
Because the Fed has been cutting the Federal Funds rate steadily since June of 2006.

Why would they do that when they know it weakens the dollar and causes inflation?
To strengthen the lending market, which collapsed in the sub-par lending bust last year. (Yep; it's those idiots that gave HUGE mortgages to people who couldn't afford it, and it's the brokerage houses that packaged a ton of subprime mortgages into securities that tanked when everyone stopped paying their mortgage.)

What makes you think this is a bubble that can burst suddenly?
Well, look at basic economics. Plenty of supply, 9 months of diminishing demand. This scenario should in and of itself lower prices. The math just doesn't work. The demand curve doesn't nearly support these exhorbitant price levels. Nor does surrent supply, seasonal variation, or any other factor. It's an artificial floor; JUST LIKE INTERNET STOCKS WERE EXPERIENCING IN THE LATE 90s.

And you know what happened there. *pop*

It's a house of cards, waiting for a catalyst.

So, what's gonna fix it?
The Fed has had enough. This last Federal funds rate cut is the last one you're gonna see. They are going to start raising interest rates. That will cause the dollar to strengthen in global markets. And when that happens, the guys currently going long in sweet crude futures are gonna jump ship like rats, which will cause oil futures to plummet, which will in turn cause pump prices to follow suit 30-45 days later. I suspect a price point as low as $55-60 a barrel is what the market *should* be supporting, which translates to roughly $1.85 gas. If that happens, and gas is cheap again, Exxon's not going out of business, they are still gonna pull their 9%; just on lower revenue.

The rest of us will love it though. When gas is cheap, people buy stuff. Consumer confidence and consumer spending are THE ENGINE that drives the bus. When Joe Six Pack is comfortable spending money, and also BORROWING money, then everything will snap into shape. Once the dollar gets stronger, the credit market will loosen. When the credit market loosens, the housing market will EXPLODE. There is a ton of pent-up demand for housing, but people won't pull the trigger because nobody is lending unless you have an 800 Beacon score, and the sub-pars are under a lot more scrutiny now. (As well they should be since this whole thing is their fault!) When housing picks up, the market for everything that houses need picks up too.

Look for a nice Christmas season.

3 comments:

Chris Burnett said...

I suspect a price point as low as $55-60 a barrel is what the market *should* be supporting, which translates to roughly $1.85 gas. If that happens, and gas is cheap again, Exxon's not going out of business, they are still gonna pull their 9%; just on lower revenue.
---
You may be on to something, Phil...

Peace, Cb

Anonymous said...

"(5/2/08) In my opinion, we're about 3 months from the start of a noticeable recovery."

Well this Saturday is exactly 3 months later and I just paid $4.15 a gallon this morning. some recovery....
Oh well some ones got to pay for Exxon CEO Lee Raymond’s $400 Million parachute!

So what do you think the economy would do with a $30 Billion a year injection? That's what we'd get if Exxon cut their prices back from the $36 BILLION they made last year (and that's just ONE oil company!). Gee do you think they could survive on only $6 Billion? I think so....
The price of gas effects EVERTHING! So it should be controlled! People bitch about "the cost of lettuce will go up if we don't let Illegal Aliens over the boarder" Just imagine how many of Pedro and Maria’s “No habla” kids we could feed with all that extra cash we are saving on low gas prices! Heck we could raise the price of lettuce AND strawberries to $40 a pound! And the best part of it would be no negative economic impact! When’s the last time a vegetable shortage strangled our country?

There is one reason and one reason only for the price of gas. Good ‘ol wholesale smile-behind-your-back-while-we-stick-in-the-knife GREED!

Have a nice day…….

Llarion said...

Yeah, um, where did oil close today? $114. It's losing value faster than your nameless opinion. Just one quarter after you didn't have the guts to sign in, gas is down $0.55 from where you were. And WHY? Becasue the oil futures market is collapsing because demand in Europe is following the u.S. lead and slowing down and the dollar is stronger. More to come. Neener, neener.

The last time a vegetable shortage whacked the economy around? Right as you were typing that. It's called salmonella. Look into it.

Get a grip, read the news, and learn to spell.