Daily Commentary: Highest US March Gas Prices on Record
I wonder how the oil issue is going to play out in this particular election since everyone seems to be talking about how high the price of gasoline/petrol is. In the US, we are seeing record numbers:
The average price of a gallon of regular is now $3.87, the highest recorded price in March. The average price is up nearly 4 cents from a week ago, and over 30 cents from a year ago, according to the Department of Energy, as more drivers face gas prices of $4 a gallon or more across the country.
Last week, the average gas price was $3.83 a gallon, the previous record according to data going back to 1990.
And despite a huge fall in the price of natural gas and heating oil, inflation is being buoyed by the rise in oil prices. So, the question is two-fold for me. A. Why are prices so high and B. What are politicians going to do about it in an election year in the US. In thinking about this question, I am reminded about 2008, when prices were also sky high. I remember having written about proposals by Hillary Clinton for a windfall tax for oil companies. Let me go into the archives, see what I find and post it here.
Here’s what I found:
- Liquidity trap of a different sort (22 April 2008): Here I say that "as the Fed increases liquidity in the market, this extra money is supposed to go to consumers so that they can borrow at lower rates. However, with the housing market and stock market as unlikely places to want to put money, it is the commodity market to which this money is now flowing". This should be a familiar argument by now since I have continually mentioned the financialization of commodities as a reason that speculative flows go into that arena when interest rates are low or falling.
- The Windfall Profit Tax: Bad Idea (29 April 2008): The title here speaks for itself but here’s what I wrote: "If we want to tax the oil companies for excess profit, the first place to look would actually be tax loopholes. The U.S. Government loses hundreds of billions of dollars due to corporate tax loopholes and corporate subsidies… For example, oil companies get massive subsidies for drilling offshore leases in the Gulf of Mexico…" And we know post-BP deepwater horizon oil spill that these subsidies cost taxpayers both in revenue and externalities. After a few words about the tax holiday idea, I sum it all up this way: "By taxing oil’s ‘excess’ profits, we risk creating a situation with unintended consequences that reach far and wide: capital mis-allocation, higher end-user prices, favoring foreign over domestic producers to name a few. The most important thing we can do is remove any distortionary subsidies the oil companies are already receiving, rather than tax excess profits. The last thing America needs is the Federal Government deciding what level of profit is excessive and what level is not."
Later in June I see a few article on George Soros decrying the commodities bubble and some after talking about peak oil and higher highs and higher lows in the oil market. But I think the thrust of those articles was that government intervention was going to make the situation worse.
Yet, there is the problem of speculation driving the price of oil higher. Even granting peak oil exists (which I believe it does), it isn’t clear to me speculative flows aren’t greatly amplifying the upward moves in oil. How do we deal with that then?
What is clear is that the high oil prices are a tax on lower-income workers and emerging markets where a larger percentage of take-home pay is used up by food and energy. This makes the rise in oil and commodity prices generally a socially combustible issue that could lead to riots as it has in the past. Some are predicting just this for 2013. So I anticipate politicians will try to get to grips with this problem. Releasing oil from the Strategic Petroleum in the US is one measure the US might take. UCSD Econ head professor Jim Hamilton doubts this will be effective. He advocates building a pipeline to allow oil currently in private stockpiles in the US to get to refiners in the Gulf of Mexico. Yet that too is not a very good solution either since we know Brent Crude is even higher; so this is not about supply bottlenecks alone. My sense is that politicians will not be able to get to grips with this problem during the election cycle because there are multiple problems (Mideast tensions, supply bottlenecks, peak oil, commodity financialization, etc). So it is likely that the oil price will rise until we hit demand destruction again. That’s my prediction of what is likely to occur.
Anyway, that’s it. Here are the links.
The average price of a gallon of regular is now $3.87, the highest recorded price in March. The average price is up nearly 4 cents from a week ago, and over 30 cents from a year ago, according to the Department of Energy, as more drivers face gas prices of $4 a gallon or more across the country. Last week, the average gas price was $3.83 a gallon, the previous record according to data going back to 1990.
Millions of dollars have flowed to journalists in speaking fees in recent years. Is this a scandal, a dark and an indelible stain on journalism, or really not such a big deal? What does Wall Street, which is all about the bottom line, after all, get from such engagements? Is this a matter of journalism ethics? Not surprisingly, what may at first seem a simple judgment call turns out to be a bit more complicated.
Greece’s current account deficit shrank 46 percent year on year in January, helped by a smaller trade gap, the country’s central bank said on Tuesday, in a rare bit of good news for the recession-hit economy.
Greece has received the first 7.5 billion euros of aid from its new EU/IMF bailout, with the bulk of the payment going to repay bonds held by the euro zone’s central banks, government officials said on Tuesday.
U.S. housing starts fell in February, but permits for future construction jumped to their highest level since October 2008, according to a government report on Tuesday that showed steady improvement in the housing market.
Greg Smith’s mea culpa about Goldman should not come as a surprise to anybody who has a remote connection with the financial services industry. But to suggest that the allegations made by Mr. Smith are unique to Goldman’s culture is ludicrous. They are symptomatic of a much broader problem embedded in Wall Street culture as a whole. Goldman’s major sin was being more astute at exploiting this system than most of its competitors.
Spanish banks’ bad loans rose to 7.9 percent of their outstanding portfolios in January, up from 7.61 percent, and the highest since August 1994, Bank of Spain data showed on Tuesday.
The Reserve Bank of India’s scope for a series of interest-rate cuts to bolster a slowing economy may be hampered by inflation risks from a budget deficit projected to exceed 5 percent for a second year.
Goldman Sachs Group Inc. (GS) should be prohibited from boosting its dividend or repurchasing stock because Federal Reserve stress tests showed the investment bank is too leveraged, according to former regulator Sheila Bair.
We’ve had a growing external debt for over 3 decades and in that time our national wealth has grown strongly. So why can’t this just go on and on? Well, actually there isn’t any reason why it couldn’t continue for many years yet. But in order for that to occur given the current structure of the economy it will require either the government and/or the private sectors to continue to expand their debt positions.
I want to focus on six deals (of the 22 that got completed) from last week that I find troubling. These are referred to as Dividend Deals. The borrower takes on new debt in order to pay a stock dividend to common shareholders. (I prefer to see dividends paid from cash flow from operations, not new debt.)
Greece is the most highly regulated economy in the OECD. Profit margins or minimum remuneration is set by law in a number of professions (lawyers, engineers, accountants, pharmacists), and licensing requirements impose barriers to entry in others (trucking). It costs less to transport agricultural products from Central America to Greece by ship than it costs to transport them within Greece by truck. Labour contracts set wages on automatic pilot due to seniority clauses and other benefits unrelated to productivity, profitability, or performance. No amount of devaluation will get rid of these distortions. Appropriately, the new IMF/EU-funded programme includes broad-based structural reforms intended to introduce flexibility in labour markets and intensify competition in goods and services markets. In fact, the new Greek programme reads like a blueprint for reforming a post-Soviet bloc country circa 1990.
The truly dreadful news last week was conveyed in the results of the Federal Reserve’s latest bank stress tests. As presented by the Fed, most of the news was good. Some large financial institutions were judged likely to have sufficient equity capital even if the U.S. economy were to experience a significant downturn. With that, banks such as JPMorgan Chase & Co. were allowed to increase their dividends and buy back shares. Naturally, bank stocks rallied.