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XMFSinchiruna (26.57)

Wag the Dog meets New Math



May 14, 2008 – Comments (5)

If you're looking for a window into the process by which you are repeatedly, intentionally, and systematically misled about the true inflation, then take a read below.  Every driver knows that gas has never been higher, and anyone who follows the energy markets knows gas is trailing well behind the rise of oil and so has further upside coming... in fact if gas remained at present prices the refiners would cease production altogether as margins go negative.  Thanks to their magic formulae, though, the gov't is able to declare to you that all is well... that there is no price inflation.  "Hey, gasoline prices actually declined last month, isn't that great?  What's that?  You saw them go up?  No you didn't.  We're the mathmagicians.  We'll tell you what you did or didn't see."

Why the fancy numbers?  If consumers knew that inflation were actually above the yield on CDs and Treasuries, then who would by those instruments?  There would be no domestic source of financing for our out-of-control spending.

Inflation pressures ease despite food price jump
Wednesday May 14, 9:03 am ET
By Martin Crutsinger, AP Economics Writer
Inflation pressures ease in April despite biggest jump in food prices in 18 years

WASHINGTON (AP) -- Inflation pressures eased a bit in April despite the biggest jump in food prices in 18 years.
The Labor Department reported Wednesday that consumer prices edged up 0.2 percent last month, compared to a 0.3 percent rise in March.


The lower inflation reflected a flat reading for energy, which helped offset a 0.9 percent jump in food costs as prices climbed for many basic items, from bread and milk to coffee and fresh fruits.

The unchanged reading for energy reflected a big 4.8 percent jump in natural gas prices, offset by a 2 percent decline in gasoline costs.

The reported drop in gasoline prices reflected the government's accounting process, which discounts expected seasonal price changes.

Since gasoline prices normally rise significantly in April, the 5.6 percent rise in prices for the month turned into a 2 percent drop after the government adjusted for normal seasonal changes. That was little comfort for motorists now paying record prices at the pump, which are nearing $4 per gallon.

Core inflation, which excludes food and energy, showed prices well behaved in April, rising by just 0.1 percent, compared to a 0.2 percent gain in March.

That reading should ease concerns at the Federal Reserve that the sharp increase in food and energy prices this year would lead to broader inflation problems.

The Fed, fighting against a severe credit crunch and spreading economic weakness, has cut interest rates seven times since last September in an effort to keep the country from toppling into a recession.

However, last month it signaled that it might take a pause in the rate cuts, with some Fed officials expressing worries that further reductions in interest rates could trigger unwanted inflation. The central bank is expected to keep rates unchanged when officials next meet June 24-26.

So far this year, overall inflation is rising at an annual rate of 3 percent, down from a 4.1 percent increase for all of 2007. Core inflation, excluding energy and food, is up at an annual rate of 1.8 percent in the first four months of this year, compared with a 2.4 percent increase for all of 2007.

Even with the slowdown in price increases so far this year, workers' wages are not keeping up. A separate Labor Department report showed that average weekly earnings for nonsupervisory workers dropped by 1 percent in April compared with a year ago, after adjusting for inflation. It was the seventh straight month that inflation-adjusted wages were down compared to a year ago.

The combination of rising food and energy costs, weak wage gains and falling home prices have left households feeling squeezed, with consumer confidence readings plunging to recessionary levels.

While many economists believe the country is in a recession, other analysts contend that the country may be able to avoid a full-blown downturn, especially if consumers spend a sizable portion of the 130 million economic stimulus payments that the government is now sending out.

The rise in food costs was led by a 3.2 percent jump in fresh fruit prices. The cost of bread was up 1.5 percent, 14.1 percent higher than a year ago, while milk prices rose by 0.9 percent, up 13.5 percent from a year ago.

Gasoline prices, even with the decline in April, were 20.9 percent higher than a year ago.

Clothing prices rose by 0.5 percent in April, even though discount stores reportedly engaged in heavy discounting in an effort to spur lagging sales.

New car prices fell by 0.2 percent last month, reflecting the trouble automakers are having with sagging demand in the face of a weak economy and soaring gasoline costs. Airline ticket prices, which had been surging because of more expensive jet fuel, fell by 0.5 percent last month but are still up significantly from a year ago.


5 Comments – Post Your Own

#1) On May 14, 2008 at 10:35 AM, XMFSinchiruna (26.57) wrote:

Burdened by the Weight of Inflation
Standards of Living Are Challenged

Nearly seven in 10 Americans are worried about maintaining their standard of living, as concern has spiked higher in just the past five months, according to a new Washington Post-ABC News poll. Soaring consumer prices are a major challenge, with many people struggling under the weight of the rising costs of fuel, food and health care.

The poll shows that the weak economy and rising prices are high among voters' concerns, and contribute to a souring national mood in this presidential election year. More than eight in 10 said the country has veered pretty seriously off-track, and a separate poll released yesterday by ABC showed economic anxiety at its highest level on record since 1981.

Overall, 68 percent of people surveyed in the new Post-ABC poll said they were concerned about their ability to keep up their lifestyles, a jump of 17 percentage points since December. The increase cuts across party and income lines, spreading rapidly among Republicans, people from rural areas and those from middle- and upper-income households.

Nearly six in 10 of those from households with annual incomes of $100,000 or higher said they were worried about hanging onto their living standards, up from a third in December. And 56 percent of Republicans in the new poll expressed concern, up from 32 percent.

In the new poll, 20 percent of those surveyed cited the higher gasoline prices as the single most important economic issue, and more, about a third, pointed more generally to rising prices as the primary cause of their apprehension.

Overall, two-thirds called rising gasoline prices a financial hardship, including a third who said higher pump prices have proved to be a severe burden. According to the Energy Department, the average cost of gas has spiked 11 cents in the past week alone; it has gone up 33 cents over the past month.

"The $3.65 gas is killing us. The $2.75 gas was killing us. And, quite frankly, I don't see how the government can stand by and be completely idle and ruin the economy," said Tom Odle, 64, a Kansan who receives Social Security disability payments and whose wife works at a graphics firm. "What this is doing to us is to completely strip away our disposable income. It just goes for gas."

U.S. gasoline consumption has continued to grow gradually over the past five years even as crude oil prices have quadrupled, but there are some signs in the poll that prices have finally hit a level that is altering driving habits. Of those who called gasoline prices a burden, two-thirds said they have cut back at least somewhat on the amount of driving they do.

But those who have not pared back their car use -- more than half of all respondents -- said that, on average, the price of gasoline would need to reach $5.65 a gallon before they significantly curtailed their driving.

That figure may have broad repercussions for oil markets and people designing climate-change policy, who hope that higher pump prices will change driving habits enough to slash the greenhouse gas emissions that come from fuel use.

In the poll, big oil companies take the brunt of the blame for high motor fuel prices. Three in 10 people said that the oil companies or greed are the main cause of the rising costs, two in 10 pointed to market forces (including supply and demand), one in 10 blamed President Bush and 9 percent pointed at the Organization of the Petroleum Exporting Countries and other foreign oil producers.

"There's no oil shortage in this country. There's no gasoline shortage, and there hasn't been for years," said Odle, who added that he believes multinational oil companies were manipulating the markets.

While oil companies were a primary target across party lines, Democrats and independents were much more apt to blame the Bush administration and the Iraq war than were Republicans. Thirty-four percent of Democrats and 21 percent of independents singled out the Bush administration or the Iraq war as the major reason behind the higher pump prices; just 7 percent of Republicans agreed.

Beyond gasoline costs, three in 10 Americans polled said they were having trouble paying other household bills because of rising prices. Of those finding the inflationary pressures hard to deal with, more than half were struggling with food costs, two in 10 with the price of electricity, 15 percent each with medical costs and other household expenses, and 11 percent with their housing costs.

"It's food, it's everything," said Nancy Scala of Sherman, Conn., a poll respondent.

Louis Hand from Orlando was one of those who highlighted health-care costs. "We could be living better if we didn't have to pay those high costs for medical care and prescriptions," he said in a follow-up interview.

And while concern about the economy has spread most quickly among middle- and upper-income households, lower-income families are still the ones having the most trouble coping.

"We've had to cut back on a lot of stuff," said Stephanie Green, 30, of Mount Airy, N.C., after returning from a trip to a Bottom Dollar grocery store, where shoppers bag their own groceries to help keep food prices down.

"I used to spend about $120 a week to buy food. To be honest, now I spend anywhere from $200 to $220 a week," said Green, who has three children. And with the price of gasoline at $3.67 at her local service station, she said: "We're basically not going anywhere. We're going to get the kids, and besides that we don't go out of the house all week."

Despite widespread concern about fuel costs, Americans are evenly divided about whether it is a good idea to suspend the federal gas tax this summer, as proposed by two presidential candidates, Sens. John McCain (R-Ariz.) and Hillary Rodham Clinton (D-N.Y.). Forty-six percent of those surveyed supported the proposal; 47 percent opposed it. And when told about criticisms of the plan, which many experts say would do little to change prices while draining revenue away from federal highway projects, support for the idea dipped to 33 percent.

That may be good news for Sen. Barrack Obama (Ill.), who said he would oppose any effort to temporarily do away with the 18 cents-a-gallon federal gasoline taxes. The Democratic presidential hopeful called that a "gimmick."

The idea of a gasoline tax holiday failed to pick up majority support from Democrats, Republicans or independents, and presented with the information about the probable impact of the tax suspension, majorities across the board opposed the idea.

The poll was conducted by telephone May 8 to 11 among a random national sample of 1,122 adults. Results from the full survey have a margin of sampling error of plus or minus three percentage points; error margins are larger for subgroups.

Polling analyst Jennifer Agiesta contributed to this report.

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#2) On May 14, 2008 at 1:05 PM, leohaas (30.12) wrote:

You've got a point when you flag this kind of math, but you need to get your facts straight: 

"in fact if gas remained at present prices the refiners would cease production altogether as margins go negative"

Nonsense! The June '08 futures prices for oil, gasoline, and heating oil are (data collected around Noon EDT on 5/14/08):
 - oil: $125 per barrel
 - gasoline: $3.16 per gallon
 - heating oil (or Diesel): $3.66 per gallon.
Assuming a 3:2:1 spread (most refineries use this spread for most of the year), a 42-gallon barrel yields 28 gallons of gas and 14 gallons of Diesel. At these prices, refining margins are just above $15.

And if refiners stopped production for even a single day, prices would go up by a couple of quarters overnight (as witnessed by the Katrina aftermath).

Count on gasoline prices to go up over the next month or even longer because refining margins are going up. 

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#3) On May 14, 2008 at 2:54 PM, Tastylunch (28.53) wrote:

Sounds like it's time to look into gold and silver again or maybe just  another currency altogether .

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#4) On May 14, 2008 at 4:31 PM, XMFSinchiruna (26.57) wrote:

Leohaas, with all due respect, my facts are just fine.

Consider that Tesoro just turned to an $82 million loss from a $116 million gain the year prior.  This was despite a one-time benefit of $45 million and an INCREASE in revenue?

Company management referenced margins while indicating they may curtail production and operate intentionally below capacity.  If Tesoro drilled its own oil, we might conclude they're sitting on production until margins improve.  But since they purchase their oil on the market, the only rational conclusion to draw is that margins have gone, or threaten to go, negative.

Your numbers do not take the cost of refining operations into account.  If plants cost nothing to run and workers would just volunteer their time, I'm sure their margins would be positive.  If, as you suggest, refiners have a $15 window per barrel of oil from which to subtract all costs and still hope for a profit, then the problem is even worse than I thought.

You'll see in the article linked above that I believe the margins have reached a critical point where independent refiners cannot profit, and so they will begin to curtail production, which in turn will raise gas prices substantially and return margins to profitability. 

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#5) On May 15, 2008 at 1:09 PM, leohaas (30.12) wrote:

Sure TSO turned a loss. That was because in the previous quarters crack spreads were low. If spreads are in the single digits (like they were in the previous 2 quarters), then you have a point. And in that case, increased revenue is no help.

However, spreads are on the way back up as you can see here. They always go up in the spring.

Yesterday's spread and the quarterly averages (NYMEX 3:2:1) for 2007 and 2008 are:
Yesterday   $15.48
Q1 2008       $9.83
Q4 2007       $7.84
Q3 2007     $13.74
Q2 2007     $24.34
Q1 2007     $12.60

Clearly, the $15 and change of right now isn't as good as last year at the same time, but a lot better than compared with 4 out of the past 5 quarters in which the pure play refiners all made money with the exception of TSO in Q1 2008.

Your reference to the story of contracting margins is half a year old. Margins have about doubled since, and therefore the reference has become irrelevant. Maybe it will be relevant again come November for comparison purposes, but other than that it is old news.

In other words, your contention that crack spreads "grow ever more miniscule" doesn't hold water. There is a simple explanation for that: demand for refined products worldwide is still going up, while supply is limited by refining capacity (which is not going up).

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