Earlier this week, the Federal Reserve published the always dynamic “Beige Book” and offered the salient observation that consumer spending had slowed as incomes were “pinched” by rising energy and food prices. This is probably not a book you want to take to the beach, although you could then call it the beach beige book and impress your friends.
Pinch. Yes, indeed, high oil prices have pinched consumers and small businesses in much the same way that Evander Holyfield’s ear was pinched by Mike Tyson. The term “pinched” reflects the wonderful art of 21st century understatement. The Fed must feel like my doctor when he warns me in cavalier fashion that I might “experience some discomfort” when he takes out that rubber glove and concludes my annual physical.
Here are some numbers pinched from our database and market coverage:
- Daily consumption of gasoline in the U.S. is down slightly from last year, but thanks to average retail prices of $4.06 gal, the per diem outlay for U.S. motorists has moved above $1.6-billion, a new record. That compares with $1.235-billion on this day last year; $833-million on the same day in 2005; $556-million in 2003; and $511-million in 2002. Yes, that means that costs have tripled in six years.
- Wholesale prices for gasoline actually moved higher this week even though crude couldn’t break through the June 6 record level (at least not yet). The ex tax wholesale cost of unleaded gasoline in most of the country is around $3.40 gal. One can usually add about 60-70cts gal on to the wholesale number and come up with a likely retail number. So, most of the country is looking at $4.00-$4.10 gal gasoline.
- The West Coast has tighter supply than the rest of the country and wholesale gasoline there costs more like $3.80-$3.90 gal. With taxes generally higher, that suggests retail prices for unleaded in the $4.30-$4.70 gal range.
- While America’s attention remains firmly focused on gasoline and crude, the price of diesel, jet fuel, and heating oil has also rallied. If wholesale prices remain at present levels, northeastern homeowners are looking at Winter 2008-2009 heating oil bills of $4,000-$5,000. If I were a Florida developer, I would be saturating the New England air waves with ads for “The Villages” and other Del Boca Vista-like communities.
The Debate Rages On . . .
Earlier this year, I cast doubt on the likelihood of retail gasoline prices moving above $4.00 gal and questioned whether crude oil prices above $125 bbl were sustainable. Remarkably, those temperate but in retrospect - - errant predictions - - have made me more attractive to media inquiries. It must be the full head of hair.
I prefer to stay on the field of play, rather than make the trek to New York or northern New Jersey to the studios. But I did do a Monday morning spot on the Today Show and a previous in-depth interview with Dan Rather aired this week on HDNet.
On the Today Show, I followed a stock exchange floor interview with Jim Cramer who opined that prices for gasoline should be at $5.00 gal based on $138 bbl crude. That’s not true and when pundits talk about where prices “should be”, they perhaps should be admonished. Back in early November, Mr. Cramer predicted that we would see $4.00 gal gasoline averages within six weeks. He was right about $4.00 gal gasoline but it took six months. He is a wealthy man, and I am not, but I have much better hair.
In the Dan Rather interview, I received an opportunity to wax philosophically about whether it’s a good thing to have investment money flow unfettered into commodities like grain and oil. I noted that it was a worthwhile 21st century question and could inspire plenty of creative thoughts and perhaps solutions. I did note that pure free market folks would probably like to trade water, insulin, and plasma in futures or derivatives markets, and added that we need to contemplate the consequences of money driving life blood commodities higher.
I didn’t suggest that index funds, or hedge funds, or institutional investment should be banned in commodities, but the debate seems to have moved in that direction. I would suggest that it’s very much not an all-or-nothing proposition.
I’m not smart enough to come up with the answers, and as a reporter, the best I can do is frame the proper questions. We can still have efficient futures markets with circuit breakers to protect the widows and orphans and the indigent. The debate should be about how best to do so.
But in any case, I’ve probably succeeded in alienating the investment banks, and futures’ brokerage houses, and professional traders in the world.
If my tortured and mutilated body ends up in a 55 gallon oil drum in New York Harbor, please tell the world my story.
News Item: ExxonMobil will sell direct retail sites.
If anyone out there still thinks that gasoline retailing becomes more profitable as prices soar, they should take note of ExxonMobil’s announcement today to sell its company-owned stations to its distributors (jobbers). Most Exxon or Mobil-flagged stations are already owned by individuals or small companies, but some 820 company-owned stations and 1,400 dealer-leased sites will be put on the block.
Multinational companies don’t get excited about the gasoline that they sell at your local street corner. Very appropriately, they get excited about finding crude or natural gas in projects that require hundreds of millions, if not billions, of dollars.
For those unfortunate souls who must buy their gasoline from oil companies and do not have crude oil in the ground, the average gross margin so far in 2008 has been about 11cts gal across the country. That’s the gross margin - - labor, rent, cost of capital, and all other costs come out of that slim spread.
Conclusion: You are unlikely to see any gasoline retailers underwriting PBS operas any time soon.