Category: Energy

Economics Update

No Comments

The Bush administration is now, finally, predicting a slowing economy, with a GDP growth rate of 1.6%…though with a higher prediction of inflation at 3.8%, it’s a net contraction, which is why they are also predicting an increase in the unemployment rate.

Given this environment, it is unsurprising that home prices fell in May by 0.9%, 15.8% year over year, which is grim.

What is surprising is that Consumer confidence was up a bit, to 51.9 from 51.0, but even 51.9 is very pessimistic.

We may be seeing a bottom of consumer pessimism, which is different from seeing a bottom to the credit crisis.

The slowdown seems to be driving the price of oil down, as well as the price of retail gasoline, and falling energy prices seem to be bolstering the dollar versus foreign currencies, though the bad news on Japanese unemployment, a 2 year high, may have contributed to this.

Still, the banks are buying lots of money from the Federal Reserve to deal with the liquidity problems, $75 billion this time, so we ain’t out of the woods.

For your amusement, a cartoon:

Economics Update

No Comments

The dollar is down relative to the Euro, because the further deterioration in the credit markets makes Fed rate hikes unlikely, though the US dollar has strengthened against the Canadian dollar, because oil has been down so much recently, which means that the Canadian trade surplus to the US, they are the US’s largest external oil supplier.

It looks to me like the financial markets are continuing their slow motion car wreck.

Banks are tightening business loans and commercial paper, decreasing total lending by 3%, and requiring much higher interest rates to account for the uncertainty.

As to what foreign investors are doing, I can’t speak for all of them, but Russia has cut investment in Fannie and Freddie by 50%, and the international monetary fund sees no light at the end of the tunnel on the housing crash.

The result is fairly straightforward, much tighter money, particularly for entities like Lehman, which has seen its borrowing costs skyrocket. They are now 7.7%, 6 months ago they were 5.2% for a 5 year bond.

This is a 4.2% premium US Treasury notes, which is about double the number in early January.

In energy, oil is up about $1/bbl today, largely on Iran concerns, but retail gasoline prices have continued to fall.

Economics Update

No Comments

Wekk, retail gasoline has finally dropped below $4.00 per gallon, the first time in almost two months, oil moved very little, depending on grade, somewhere between ±$0.15/bbl.

Meanwhile, Nouriel Roubini is arguing that foreign central banks and sovereign wealth funds are increasingly less willing to take huge losses in order to bail the USA’s financial system out, and that this will lead to a systemic collapse, with, “ensuing fall of the U.S. will make this fire sale of the best U.S. private asset a true bargain basement deal: with the dollar price of these assets now imploding and with the U.S. dollar now in free fall non-residents will be able to buy most of U.S. Inc. for the cheapest bargain.”

One final note, and some information that shocked me, is the amount which short sales decreased in financial stocks as a result of the new SEC rules banning “naked” short selling: 98%.

S3 Matching Technologies is reporting that short sales in the newly regulated stocks fell by a factor of 50, which is far more than I would have expected.

Even if some of the decline in short sales was investors who were spooked by the new rules, it’s clear that the overwhelming number of short sellers are engaging in “naked” shorting.

Rolls Royce Looking at Trades Between Time on Wing and Fuel Consumption

No Comments

RR is starting to look at the future of air transport propulsion, and it has everything on the table right now, including increasing maintenance to reduce fuel burn, which is as close to heresy as you can find in commercial aviation.

Time on wing has been king for a very long time. It’s one of the things that allowed early jet liners to beat their piston, and to a lesser degree turboprop (gearbox maintenance), competitors: that the could stay in service, and flying for a very long time.

It’s an interesting testament to the changes wrought by the increasing oil price spike, and it convinces me that open-rotor propulsion will make it to commercial use this time around.

Why John Sidney McCain Didn’t Talk to the Exorcist

No Comments

I mentioned that the sick old man was going to Louisiana to talk with Bobby “The Exorcist” Jindal, and the scuttlebutt was that he was sizing him up as a VP running mate.

Well, he also intended to fly to an oil rig, to talk about the safety of oil rigs, and to falsely state that there was not a single oil spill post Katrina:


Dennis Knizley looks out on an oil rig beached just off of Dauphin Island, Ala., Tuesday afternoon, Aug. 30, 2005, a day after Hurricane Katrina destroyed much of the island and brought the enormous structure a few hundred yards from shore. (AP Photo/Birmingham Post-Herald, Jan-Michael Stump)

In fact, there were somewhere between 146 and 595 oil spills, depending on whose numbers you use, that spewed 9 million gallons of oil.

In any case, the McCain campaign canceled the flight to the oil rig, claiming that the “weather” was to blame, though the weather was actually pretty good, it further south, on the Tex-Mex border where Dolly was hitting.

More likely what stopped him from giving the speech was the fact that there was a barge accident on the Mississippi that day, which spilled 419,000 gallons of oil, and it would have made the campaign stop look like a clown show.

Come to think of it, the entire campaign is starting to look like a clown show, and I’m beginning to wonder if God hates the John McCain campaign.

Economics Update

No Comments

Fairly slow news day: retail gasoline down, oil down, and dollar up.

In what has to be the most obvious bit of analysis this week, the Office of Federal Housing Enterprise Oversight (OFHE)) is saying that Fannie Mae and Freddie Mac may record more losses as a result of the moribund real estate market….Seriously, this could have come out of a fortune cookie, particularly since we are seeing more indicators that the housing market has not hit bottom:

Mortgage applications fell 6.2% last week, (again, note that this is a noisy number), and California foreclosures hit a 20 year high in the 2nd quarter….actually the most ever, since they didn’t start collecting the numbers until 1988.

Mexican State Oil Company Threatens to Drill Outside of Mexico

No Comments

Bloomberg.com: Exclusive: “Pemex May Drill Outside Mexico for First Time If Reforms Fail”

Pemex needs foreign help because it doesn’t have the technology to drill in water deeper than 500 meters (1,640 feet), he said.

Pemex may need foreign help, but it does not need a partner.

It can buy that expertise without a foreign partner. Oil field services companies like Slumberger (disclosure) can do this on a fee for service basis.

And it turns out that their “threat” is to do a partnership with Petroleo Brasileiro, which has more deep water experience.

They are trying to get through with a bill that will allow “partnerships” that are ownership in everything but name, because someone gets the fat “commissions” for brokering the deals.

The Big Picture on the “Stop Excessive Speculation Act”

No Comments

I’ve always been a doubter that speculation is responsible for much of the run up in oil prices, but I wholeheartedly the proposed “Stop Excessive Speculation Act”, which would crack down on speculators by allowing the Commodities Futures Trading Commission (CTFC) to regulate futures market and, “differentiate between “legitimate” and “illegitimate” hedge trading”.

The reason that I support this is because it is a real sea change. It is a refutation of the myth that completely unsupervised markets self-regulate to the benefit of society.

It is the arbitrage and exotic financial vehicles that have been created in the past nearly three decades of free market fundamentalism, frequently lauded by Alan “Bubbles” Greenspan, which are at the core of our current credit crunch.

The markets have devolved into complex self-serving insider deals that have harmed everyone.

I think that this bill is a baby step, but it’s a step in the right direction.

Economics Update

No Comments

Charles Plosser, President of the Philadelphia Federal Reserve, called for rate hikes to forestall inflation. Not surprisingly, the US dollar has risen as a result.

Meanwhile, the banking meltdown continues aplace, with Wachovia losing $9.9 billion dollars and exiting the wholesale mortgage business, meaning that they will no longer offer mortgages through independent brokers, and WaMu Lost $3.3 billion too.

I would also note that federal examiners auditing the GSE’s books, though this is more a preparation for a US government bailout than it is any concern for wrongdoing.

Considering that U.S. home prices 4.8% from May 2007 to May 2008, I’d count a GSE bailout as likely.

Seeing as how tropical storm Dolly largely missed the offshore oil rigs, it’s not surprising that oil prices have fallen, and it appears that retail gasoline is doing the same.

Still, this is mostly a symptom of a slumping economy, where less oil is needed, much as UPS’s profit slump of 21% is clear evidence of a radically slowing economy.

It’s also old home week at 40 Years in the Desert, because we have some news about another monoliner insurer in trouble, this time, it’s Assured Guaranty, one of the two insurers left with AAA ratings from all three major agencies, that is taking a tumble, because Moody’s is making noises about a downgrade.

Economics Update

No Comments

The Leading Economic Indicators have now fallen for the 2nd straight month. It’s down 2.1% year over year, putting it in the 2001 recession category.

In a related matter, it appears that Freddie Mac may be trying to unwind its debt exposure a bit, as we have reports that it will be purchasing less mortgage debt from lenders, making getting a home mortgage more difficult.

Oil is back above $130/bbl, largely on concerns about Iran and Tropical storm Dolly, but gasoline prices continue to fall, it’s now about a nickel down from the record.

The dollar is slightly weaker today, but I think that the delta is more a non-movement than a movement.

For some well predicted hilarity, note that Bank of America profit took a 41% hit, in part because the newest member of their stable, Countrywide Financial, lost $2.3 billion this quarter.

I told you so.

Economics Update

No Comments

Weekly unemployment filings are up 16K from last week, which is not good, but better than forecast, though, as I’ve said before, the weekly data is noisy and not very useful.

On the other hand, the Philadelphia Fed Business Outlook Survey is definitely downbeat, though not as grim as I would have anticipated.

China has problems. While its growth rate slowed to only 10.1% annually(!), inflation remained well above 7%.

Honestly, I think that the fix here is simple, let the Yuan rise some, which would decrease the relative cost of imported energy, and slow exports to cool down the economy, but I do not expect the Chinese central bank to do this.

Housing starts jumped 9.1%, only because of change in NY City building codes, allowing for more multi-residential building. Otherwise it would have been -4%, and construction of single-family homes dropped by 5.3%, hitting a 17 year low.

Seeing as how the Europeans have inflation concerns too, and are talking about ratcheting up rates, it;s not surprising that the dollar fell today.

Oil continues its slide, dropping below $130/bbl for the first time in over a month, though retail gasoline holds at yesterday’s record.

Peak Oil Closer Than You Think

No Comments

Brian O’Keefe, and editor at Fortune Magazine wonders why OPEC isn’t opening the spigots to prevent a world wide recession with the possible result of a collapse in oil demand which would drive prices down.

There are two answers, they want the money now, or the spigot is already full open.

Well, Steve LeVine at competitor Business Week has received a copy of a document which, if true, settles the dispute, because it says that the House of Saud is incapable of pumping oil at the volumes that they promise:

But the detailed document, obtained from a person with access to Saudi oil officials, suggests that Saudi Aramco will be limited to sustained production of just 12 million barrels a day in 2010, and will be able to maintain that volume only for short, temporary periods such as emergencies. Then it will scale back to a sustainable production level of about 10.4 million barrels a day, according to the data. Business Week obtained a field-by-field breakdown of estimated Saudi oil production from 2009 through 2013. It was provided by an oil industry executive who said he had confirmed it with a ranking Saudi energy official who has access to the field data. The executive, who has proven reliable over several years of reporting interaction, provided the data on condition of anonymity to protect his access to the kingdom and the identity of the inside contact who confirmed the information.

The fact that the House of Saud is notoriously closed mouth about its assessments of its oil reserves lend additional credence to this document.

It means that oil is high because we are pumping, and burning, as much as can be pumped out of the ground, and so minor disruptions create spikes, and a long term minor spike could create actual physical shortages.

Economics Update

No Comments

The Consumer Price Index CPI, just
jumped 1.1% in June. For the past 12 months, it’s been 5.5%.

Considering how bogus the CPI stats have become, I’d be inclined to at at least 3% to both numbers, but but I’m an engineer, not an economist, dammit!*

On the other hand, oil is now down about $11 over two days, which would explain why the dollar is holding steady for now, though we are not seeing any good news at the pump, as we hit a new record again.

Industrial production in June was up by 0.05%, which beat expectations, though part of that number was a rebound from the strike at American Axle in May.

Mortgage applications were up 1.7% last week, though I’m not sure how much of this is low rates, and worry about rising rates, and noise.

Let me finish that I will have a separate post on the GSE’s and how their possible reduction/elimination of dividends may have led to the SEC’s restrictions on naked shorting.

*I LOVE IT when I get to go all Doctor McCoy!!!

Economics Update

No Comments

Well, we have to open up with inflation in the producer price index, 1.8% for June, and 9.2% year over year, though the 1.8% rate actually comes closer to 22% if annualized.

The Fed ain’t cutting rates any time soon, and apparrently neither is the Japanese central bank, which is holding rates steady at ½%. (Talk about pushing on a string!)

Even so, the dollar hit a new record low against the Euro before settling a bit.

Then we have General motors announcing massive job cuts and that it would suspend its dividend, which it has not done since 1922.

So GM paid a dividend throughout the Great Depression, but will not do so now.

Not surprisingly, Bernanke was rather downbeat about the economy in testimony before the Senate Banking Committee.

On the bright side, the doom and gloom has convinced everyone that the US is headed into a severe recession, reducing our demand for oil, so oil prices fell $6.44/bbl, the largest drop since Jan. 17, 1991, when Poppy Bush pulled oil out of the strategic petroleum reserves.

Unfortunately, this has not yet translated to relief at the pump, with retail gasoline hitting a new record high.

In the world of retail, there was a sales increase of just 0.1%, which, as Barry Ritholtz notes, is a a contraction when you figure in inflation, and even worse when you pull out food and energy.

Czechs Experience Difficulty with Russian Pipeline

No Comments

Well, the Czechs have signed a deal with the US to install an ABM radar which is clearly directed at least as much at the Russia as at Iran, and they are shocked to discover that there are problems with oil deliveries:

Shipments to Czech oil refineries through the Druzhba pipeline, which ties Siberian fields to the Czech Republic, are declining, the Czech Ministry of Industry and Trade said. It did not say by how much.

You sign off on a policy that is pretty explicitly threaten Russia, and you are surprised when they retaliate?

What planet are you on?

Economics Update

No Comments

Well, it appears that it’s been an unsettled day, likely because of concerns about the GSE(s), which will get its own post, and as a result, oil hit a new intra day high, $47.50/bbl, before settling to $143.84/bbl.

Note that in addition to uncertainty in Iran and Nigeria, there is now a possibility of a strike in Brazil.

Gasoline prices fell though, finishing below $4.10/gal for the first time in a week.

In currency, uncertainty has driven the dollar down, but there is a bit of a bright side to all of this, because the falling dollar is pushing the trade deficit down.

The problem is that once the dollar settles down to a more sustainable level, there will be a high inflation interregnum where imports prices will go up, but there will be no domestic businesses to pick up the slack.

Nothing on US real estate today, but in the UK, their housing crash is the worst since the Great Depression.

Additionally, we have a monetary picture that appears to point toward a vicious deflationary recession spiral.

Chart pr0n:

OPEC Secretary General Warns of Extreme Prices in Event of Strike on Iran

No Comments

He is saying that there are no supplies or reserves that can replace the loss of Iranian production.

Abdalla Salem El-Badri presents the price spikes as potentially “unlimited”, which is obviously hyperbole, but when one considers that there is no spare capacity, losing about 5% of oil production doesn’t just produce price spikes, it produces a real shortage, where one may not be able to find oil at any price.

If there were an interruption of this nature, I would expect oil to spike past $200/bbl within a few weeks.