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23 comments on Who is borrowing what from whom?

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drew on September 6, 2005 - 7:07am Permalink | Subthread | Comments top
I wonder to what degree the domino effect has been set in motion.  The thought has already been mentioned, yet if the combination of all the steps these energy "entities" have taken (since Katrina) is considered, I wonder what implications we face in both the short and long term?  

Perhaps we are still too close to the event to grasp these affects.  But at least in terms of the short term gasoline supply / price, I wonder how much stress the US economy can take without suffering significantly in the long term?

More specifically, how long can our economy withstand $3 + gasoline?  In the US, much (if not all) of the surplus income that lower and middle class families have will be redirected toward (1) fuel costs, both for transportation and heating and / or (2) the increased cost of food and other basic necessities as a result of shock in refined fuels.  This income will be unavailable for consumer spending in our credit / debit based economy and will possibly send the US economy into recession or worse.

I realize that many economists will present the "Pollyanna" picture so as to not disrupt the status quo, but what are the more realistic (or truthful?) economists saying?

And I guess maybe a more important question is this:  will we as a society use the potential of this event to change our attitudes and actions toward energy, particularly oil before it's too late.  Or is it already too late?

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louGrinzo on September 6, 2005 - 7:43am Permalink | Subthread | Parent | Comments top
Drew, you ask a lot of the same questions I've been pondering the last few days, particularly with respect to the longer term consequences.

I think that the US economy better be able to withstand $3 gasoline, or learn how to do it in a hurry.  My hunch is that gasoline prices will ease a bit over the next few weeks, but not substantially.  The oil and gasoline swapping that's being publicly talked about is, I think, aimed more at calming the market in the short run than fixing any supply problems.  But once we get into the annual Spring price run-up in 2006, things could get a lot more interesting.

Another thing we all have to keep in mind, which you alluded to, is that the US economy is frickin' HUGE, so things like energy cost increases take quite a while to work their way through the system.  If gasoline, diesel, and jet fuel prices stay at about their current level, then we will indeed see price increases in virtually everything.  Energy-intensive goods and services (overnight package delivery, airline tickets) will rise a lot more than some other types of product, and could trigger some really nasty economic effects (like bankrupting a couple of airlines and putting thousands of people out of work).

Will we learn from this event?  Who the hell knows.  That really is the most important single question (aside from anything related to the humanitarian effort on the Gulf Coast, of course), but it's so tightly interwoven with market psychology, politics, economics, and who knows what else that even a prediction-loving economist like me won't take a guess.

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mw on September 6, 2005 - 8:57am Permalink | Subthread | Parent | Comments top
A perfect storm of price woes would see the impact of higher overall energy costs rock the consumer faster, with persistant:

  • higher gasoline
  • higher heating oil (almost a given this winter)
  • higher natural gas (on track to make a record this winter)

Suddenly you've got "average" folks paying 200 - 400 - 1000 more for transport fuel and 30 - 70 - 100% more for heating costs.

Each winter month.

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Halfin on September 6, 2005 - 10:11am Permalink | Subthread | Parent | Comments top
There's an interesting effect when everyone starts paying more for fuel. Most people would say that this is inflationary, because businesses have to pass along their increased costs. But I've also seen analysts say it is deflationary: because people are spending so much on gas and heating, they have less to spend on other areas, so businesses can't raise prices.

I know most people around here don't care for economics, but it is interesting to know that economically, expensive energy is neither inflationary nor deflationary. Instead, it causes rather complicated changes in the price of items. Generally, everything in the economy has a certain percentage of its costs associated with energy. Some things have a relatively low percentage of their cost being due to energy, like, say, hand-made quilts. Other things have a high percentage due to energy costs, like airline tickets. What will happen when energy increases in price, if the money supply stays roughly constant, is that high-energy-percentage items will get more expensive, while low-energy-percentage items get less expensive. Items that use exactly the average amount of energy as a percentage of costs will not change in price.

It's not always obvious to the non-expert which items use more or less energy than average to make. But this is what will determine whether the prices for those items rise or fall.

This is why we see these contrasting analyses, some predicting inflation and some predicting deflation. It depends on which kinds of goods and services the analyst is focusing on.

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Donal on September 6, 2005 - 10:51am Permalink | Subthread | Parent | Comments top
Unfortunately for me, just about everything in construction requires energy to ship and install.  Even moving the soil requires heavy equipment.  I have found that high energy costs scare clients into either canceling construction projects outright, or putting them on indefinite hold.  

Back in the 1900s, someone told me that hard times were good for restaurants, because folks would go out more to cheer themselves up.  I'm working now and I can't afford to eat out.

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Stuart Staniford on September 6, 2005 - 12:45pm Permalink | Subthread | Parent | Comments top
You're neglecting that the lady making the hand-made quilts lives in a house made out of concrete, long-hauled timber, steel, etc, drives a 1985 Buick with lots of embodied energy and which gets 18 to the gallon, etc, etc. If she doesn't charge more for her quilting labor, she's going to have to cut back on her lifestyle. She will charge more if she has pricing power (eg after some other quiltmakers go out of business), and otherwise her sector will just contract until it does have pricing power and can then join the inflationary trend.
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louGrinzo on September 6, 2005 - 10:15am Permalink | Subthread | Parent | Comments top
I would be cautious about using the "perfect storm" line--you can always imagine a worse, and therefore more perfecter, situation.  (E.g. in our current situation, as you accurately describe in your three bullets, a terrorist attack blows up key Saudi production facilities or blocks the Strait of Hormuz, the highest volume oil shipping lane/bottleneck in the world.)

Can you elaboprate on the "200 - 400 - 1000" comment?  Are you really talking additional dollars per month just for transportation?  If so, please explain where those numbers come from, as that kind of money buys a lot of miles in absolute terms, let alone as an additional cost.

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NC on September 6, 2005 - 9:52am Permalink | Subthread | Parent | Comments top
I agree with all of above posts. And this morning on NPR there was a spot in the Marketplace section of Morning Edition that a British 'insurance underwriter' (not sure on title) was estimating that the actual cost of cleanup and rebuild after Katrina might be closer to 50 billion.  Substantially higher than previous estimates of 15-35 billion.  

On same NPR spot they talked about increased costs of lumber, steel and concrete on the mercantile exchanges.  This will add to the cost of reconstruction and hurt the existing housing market.

Anybody else hear this spot and can get the link?

All of this points to a rocky economy this winter if true.

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drew on September 6, 2005 - 10:01am Permalink | Subthread | Parent | Comments top
Maybe a dumb question, but isn't there a relationship bewteen the propane and NG markets?  I know there is a relationship, but am unsure of what the outlook is on propane?
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ClintB on September 6, 2005 - 12:34pm Permalink | Subthread | Parent | Comments top
I believe they are only slightly related, in the same way oil and NG prices are related as energy sources.  Propane is a by product of oil refining, while natural gas is not.  The market for propane is well supplied as a result of the increasing use of oil.  At $1.10 per gallon, it may be one of the better energy deals...
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23 comments on Who is borrowing what from whom?

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