Forgive me for not rendering a post for about two weeks. A visit to Florida (I feel young again!) was followed by a short Thanksgiving week, and then a cavalcade of deadlines and duty. Unlike many of the talking heads on television, I have a day job, and prefer to be on the field of play most days.
I have maintained that $40 bbl is the new $10 bbl for crude oil. That is to say that just as $10 bbl was a bottoming point in 1986 and again in 1998-1999, the $40 bbl level probably represents a radical low extreme in 2008. I also sense that we will at least visit price points in the high $30’s, but I predicted last month, that such a visit would be akin to just a “cup of coffee” visit. I’m still convinced that below $40 bbl represents an overreaction, but to stretch the metaphor, we may take in dinner and a movie in the $30’s.
The lesson learned: never say never to price extremes, whether the reckoning be for equities or for commodities. I believe that January 2009 will represent the most “challenging” and ugly economic month of my lifetime, and my first memory is of Sputnik. Some examples of the incredible breadth of the 2008 price plunge are listed at the end of this post.
The nice thing about a price plunge is that the media attention isn’t nearly as intense as it is when prices are headed skyward. When gasoline was north of $4.00 gal, I could have had as much air time as The Jonas Brothers (I am clueless as to their allure to the population) or Miley Cyrus.
The easy call is that street prices in the U.S. will soon dip below $1.75 gal nationally, and many towns and hamlets will see $1.50-$1.60 gal. The mechanism for such action has already been crafted - - it’s just a question of how dramatic the downswing will be. If prices were frozen at today’s wholesale levels, we would be headed toward a $1.50 gal average by the Epiphany.
Speaking of the downswing, I am struck by the wild numbers attached to the benefits of these lower prices for consumers.
I like to talk about the direct impact. Gasoline demand this month will probably average around 9-million barrels per day or 378-million gallons per day if we make the volume conversion. At a price of $1.75 gal, that translates into $661.5-million in daily expenses for the teeming U.S. masses.
For the entire month, that projects to about $20.5-billion directly spent on fuel. That would compare with a December 2007 monthly expense of $36.4-billion. Good news to folks that live paycheck to paycheck, to be sure. But it still exceeds the $17.16-billion that Americans spent on gasoline in December 2003.
My point is that you can cite cheap gasoline as a silver lining, or as Larry Kudlow might say a potential “mustard seed” for an economic recovery. However, you need to choose your comparisons closely. We are paying more than $900-million less each day than we were in December 2007, but we are paying more than we were five years ago.
I rendered some of these observations and they were picked up by a CNBC online reporter earlier this week. You can read the entire piece at www.cnbc.com/id/28020597
But here is where I stumble, perhaps because I don’t have the same training as classic economists such as John Maynard Keynes.
The CNBC piece that quotes yours’ truly also quotes Nariman Behravesh, the chief economist with Global Insight. For the record, my name is much easier for those of you who wish to play The Name Game (also known as The Banana Song). If you are too young to remember it, visit http://en.wikipedia.org/wiki/The_Name_Game and you can freshen up.
Mr. Behravesh says that “Every 10 cent drop in the price of gasoline is the equivalent of a $12 billion tax cut” and adds that the drop from about $4 gallon to less than $2 gal is the “equivalent of a $250-billion tax cut, more or less.”
How is that so? How many times does one have to count a 10cts gal drop to achieve that savings. Ten cents translates to $37.8-million directly (378-million gallons times 10cts) but how does one extrapolate that the $37.8-million gets spent 317.46 times? I’m not suggesting that Mr. Behravesh is disingenuous - - I’m just wondering how one can calculate that the $37.8-million gets multiplied so many times. Did we borrow one of the calculators from the mortgage bankers?
Points To Ponder On The Petroleum Precipice
- - We didn’t see a sweet crude price of over $100 bbl until January 2, 2008. Today, we saw crude oil close at $43.67 barrel – the price is down $101.51 bbl from the all time high close of $145.18 bbl on July 14, 2008.
- Most of the world has a fixation with crude - - - however, the bulk or “spot price” for gasoline has actually dropped as much as $125 bbl since June and July. The actual wholesale or spot price for gasoline today is under $40 bbl in Houston, Los Angeles, San Francisco, and Chicago. New York has the most expensive gasoline in the country, but prices there are barely above $40 bbl.
- The first shall be last. If this price decline strikes you as biblical in proportion, then you have clearly read Matthew in the New Testament. California prices have always led the country higher, and lagged on the downside. But California retail numbers will soon be $1.50 gal below the same day year ago, and the cost of gasoline blendstock in places like San Francisco is about 89cts gal, or $37.38 bbl. This part of the country usually sees the highest costs for gasoline and right now, the Golden State is closer to the bottom.
- Retail prices of below $1.25 gal could soon pop up in some interior markets. The price of wholesale gasoline in Great Lakes states has plunged as low as 83cts gal, and this is one of the most competitive markets in the U.S. Don’t be surprised to see some pump prices beneath $1.25 gal in states like Missouri, Illinois, Ohio, and Indiana.
One commercial. I’ll be kicking off a special conference at the Ritz Carlton in Orlando, Florida next month, on Monday, January 26, 2009 to be precise. We’ll then hear from a key member of President-elect Obama’s economic team – Jared Bernstein of the Economic Policy Institute - - as well as top experts in capital markets, refining, global security, transportation and c-store evaluations. OPIS will also reveal how the 2008 fuel numbers measure up in terms of profitability, brand rankings, and other market metrics.
If you’re interested—and who wouldn’t want to visit the Ritz in Florida in late January? - - I recommend you take a moment right now to visit the detailed descriptions of the conference, including the speakers and topics at www.opisnet.com/priceoutlook/