Tuesday, February 28, 2012
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We've Got Four, Do I Hear Five?
This is what you would hear from an auctioneer were folks bidding on a gallon of gas. Yet if it were truly an auction, the bidding would stop at some point. All bets are off when we're talking about market pricing.
Gas prices where I live have already reached the $4 per gallon mark for regular unleaded. Talk about reaching the $5 mark doesn't seem very far fetched.
The usual reasons for a spike in gas prices swirl. The unrest in Iran, for example. Presumably, the experts are using the term in comparison to the usual peaceful state that region typically enjoys.
One industry analyst, in response to the idea we might actually breach the $6 mark, suggests that prices may not necessarily continue to rise. They may level and begin to drop as low as $3 per gallon. He believes this is possible should the United Nations reach a resolution with Iran.
I might add one more condition here that is equally as likely to occur. That is, when a certain place of Biblical reference freezes over.
Aging U.S. refineries are blamed as another contributing factor. With U.S. demand at an all-time low, it costs petroleum refiners too much money to keep producing gasoline at the same level. A handful of the larger refineries were shut down, including Sunoco's Marcus Hook facility and ConocoPhillip's Trainer plant. Together, these two plants produced about 20 percent of all gasoline refined in the Northeast.
Hess shut down a major refiner in St. Croix. This, along with other pending closures and the two mentioned above, will reduce our current East Coast refining capacity by 50 percent.
It should be noted that the low demand is due to the commodity's high cost.
Oil is a commodity. As such, it's subject to the same market volatility as gold, silver, currency, or any other product traded on a whim. Except it occurs on a global scale.
Speculators hear about the possibility of an embargo on Iran, prices will spike as the possibility of a shortage looms. They hear about contract negotiations for a new deepwater rig in the Gulf of Mexico, shortage averted. Whether or not the rig is actually drilled.
Iran has not launched a nuclear weapon towards Israel. They've not blocked the Strait of Hormuz. There are more oil rigs drilling in the Gulf of Mexico today than there were before the BP oil spill.
Yet gas prices have risen over 10 percent since the beginning of this year. Folks, that's a kind way of saying "in the past eight weeks."
The media held the previous administration to task when gas prices brushed the $4 level in 2008. He was "in cahoots with his buddies in the oil industry" in allowing the prices to rise. A resolve was publicly demanded.
They responded by lifting presidential and congressional moratoriums on expanded drilling in the Outer Continental Shelf to increase supply. By the end of the term, the price of gas had decreased by 9 percent over what it had been eight years earlier.
Where is the outrage we saw four years ago?
It should be duly noted that 30 billion gallons were released from our Strategic Petroleum Reserve (SPR) in June of 2011 in an effort to induce other countries to step up their oil production. This was in response to problems in Libya - last year's big threat. Prices are still rising.
Legislators tell us that there isn't much they can do about our current problem. Energy policy takes years to come into fruition. We won't gain immediate relief from anything he can enact today.
Critics blasted earlier legislators for high gas prices as far back as 2006 when they reached $3 per gallon. It was a key point during the 2008 presidential campaign. Failed energy policy, they claimed.
Why isn't this administration held to the same standards as its predecessor?
We'll take a closer look at current energy policy in the next article.
$5 Gas Part Two
Let's consider THE words offered in the first article again. "Energy policy takes years to come into fruition."
How many years? Are we there yet?
I'm referring to words Energy Secretary Steven Chu made to The Wall Street Journal during the 2008 presidential campaign. At the time, he was merely a Nobel-winning physicist and not yet a member of the Obama administration. And these words have come back to haunt him now.
"Somehow," Chu said, "we have to figure out how to boost the price of gasoline to the levels in Europe." At the time, European gas sold for $9 to $10 per gallon.
He offered this statement as a means to drive America away from dependence on foreign oil and encourage the development of energy efficient automobiles.
You'll hear these words often in this pivotal election year, as Republican candidates have used them as a rallying cry.
President Obama's pledge to develop sustainable energy sources is well-documented. Whether or not he supported Mr. Chu's idealogy may never be proven. But it will provide an awful lot of speculation.
Moving away from oil dependence is a noble cause. But not yet practical. And force-feeding products not-ready-for-prime-time on an American public during a weak economy, when we can least afford to be guinea pigs, is not the answer.
We may be close to developing an electric car that can live up to its hype, but right now our best offering is the Chevy Volt.
Let's put aside the risk of electrical fires for now and focus on economics of the car itself. With a sticker price starting near $40,000, it isn't within reach of the average American worker. The battery isn't included in the base price. You'll pay an extra $2,000 for that.
Fox News correspondent Eric Bowles test drove a Volt at the request of General Motors. His findings were less than desirable.
The advertised range for a full battery is around 35 miles. Bowles never got more than 25 miles out of a single charge. And it takes a full 10 hours to recharge a drained battery.
He calculated the cost to recharge that battery. Multiplying the reported 16 kwh capacity by the $1.16 per kw hour his utility company charges for electricity revealed the cost to recharge to be $18.56. Divide that by the 25 mile range he got out of a single charge to make the cost per mile to operate the Volt a whopping 74 cents.
Compare this to a similar car with a gasoline engine that gets the same 32 mpg as the Volt when it's not powered by the battery. Even at today's $4 per gallon gas, the cost per mile is only 13 cents.
I can offer similar examples using alternative fuel vehicles but this article is already getting too long to retain reader interest. Those who want to learn more can do a quick Google search. The facts can no longer be hidden by rhetoric. They're out there available to anyone with mild curiosity.
Don't get me wrong. Green is good. We just have to have the resources in place before we can adapt the technology. It doesn't work very well the other way around.
Current energy policy hurts those most in need. People living paycheck to paycheck, or unemployment check to unemployment check, scrimp pennies to get through each week. They don't have an extra $5 to fill their gas tank this week.
It's that "one percent" that can still pull away from the station with a full tank of gas.
It may not be our generation that solves our energy problems. We weren't concerned with such things in our formative years. They just weren't an issue.
But they are for our children. And their children. They'll build from what we've started and move us in the right direction.
Until then, be careful what you wish for. You may just find that you can't afford it.
A Strong Currency
A strong currency, or more importantly, a strong central bank, is a necessary ingredient for a prosperous society. This young country's very early years were marred by recurring financial panics and no central banking system, much less a currency. A young trader named Alexander Hamilton understood the necessity of a strong central bank and currency. Hamilton had a unique perspective, growing up poor on the tiny Caribbean Island of St. Croix, which was then a major trading post. Working at the trading docks, Hamilton recognized how crucial a strong currency and banking system were to the facilitation of commerce. Once in the United States, he attempted to establish a central banking system modeled after that of Great Britain.
He had many opponents, the chief among them, Thomas Jefferson - who hated banks. Jefferson thought banks were institutions of the wealthy only. Sound familiar? Hamilton was ultimately successful. And in 1792, the first Bank of the United States was chartered.
Although very successful, when the Jeffersonians came back to power, they failed to renew the Bank's charter in 1811. For the next 73 years, the United States had no central bank. This was a critical mistake, as the subsequent period was marred by repeated bank failures and other economic calamities. From a financial perspective, the country paid an incalculably high price for that period with no strong central bank or currency.
Following the Civil War, the U.S. Government began to exert more influence over the nation's banking system. Yet it wasn't until the Federal Reserve was created in 1913 that the United States had a permanent central bank. And much prosperity was to come as a result.
The overall mission of the Federal Reserve and its "dual mandate" are beyond the scope of this article, however, the importance of a central bank and a single supported currency is hard to overstate. For example, asset values over time can now be quoted and measured in dollars. It is true that inflation erodes the purchasing power of the dollar over time. While zero rates of inflation would thus be optimal, this is not realistic in a modern economy. Thus, the Federal Reserve tolerates, even targets, some low rate of inflation. This control of inflation is a fundamental and perhaps the most crucial mission of the Fed.
In reality, inflation is about perceptions. And as long as investors and consumers can rely on a currency to have a very stable value over time - they are free to make long term investment decisions and risk capital. Building factories, buying a home, saving for retirement are usually long term endeavors.
The creation of the Federal Reserve led to an entire generation of Americans that finally could save substantial amounts of wealth to be spent at a later time. Everyone living off investment income from an IRA or 401K owes the Fed a debt of gratitude.
So why are banks and the Fed so maligned in our society today? And why do so many people dislike banks? For the same reason Thomas Jefferson disliked banks: They represent concentrations of wealth, or "tools of the rich," as Jefferson once opined. Jefferson was a brilliant statesman who deserves his place in history, but on this topic he was misguided - as are the modern day "bank haters."
It must be understood that a strong central bank (and currency) are absolutely crucial tools of a prosperous society, regardless of the socio-economic group with whom they are associated. Remember: Only two ingredients are added to an economy to create wealth: labor and capital. The vast majority of individuals have no capital so they contribute labor (working at a job). But the other ingredient - capital - is just as necessary, yet often ignored or forgotten. Banks facilitate the flow of capital in an economy, without which little or no growth would be possible. There is an abundance of empirical evidence across the globe to support this claim.
So should we bail out our banks during a financial crisis? Absolutely. Actually, this is part of the Federal Reserve's aforementioned legislative mandate to become "a lender of last resort" to the banking system during a financial crisis. Banks, by their very nature, are highly leveraged entities. So it does not take much of a shock to render them, all of them, insolvent.
Leverage on bank balance sheets is also what creates wealth in an economy. Sometimes this requires the Fed to backstop the system. And during financial panics, preserving the system with temporary capital is a critical mission of the Federal Reserve - the news media be damned. This is fundamentally different from bailing out a commercial entity such as an energy company or car manufacturer. And such support is cheap, given the alternative. The Fed's inability (by statute) to provide such assistance to the banking system was a major reason that the 1930's Great Depression dragged on for a decade.
Perhaps the media should have stated the issue thus: "Due to the recent economic downturn, the Federal Reserve, lender of last resort, implemented its contingency plan to provide adequate liquidity to the financial system as the markets are allowed time to stabilize."
My guess is there would be much greater support for the best banking system in the world.
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