Fuel: Price Plummet Due to 6% Drop In Demand? Don't Count On It!

A few months ago, the price of gas at my local Wal-Mart was nudging the $4 mark.

Today, it's $1.89.
Almost every day, I have breakfast at Duke's Chevron on Jacksboro Highway. Sausage biscuit, cold tea that I bring from home (see my post about my too-expensive diet cola habit) and a newspaper, specifically, the Fort Worth Star-Telegram. Today there was an article in the Star-Telegram explaining this spectacular drop, complete with a quote from the president of the National Petrochemical and Refiners Association. "It's supply and demand....this summer there was a monumental shift [downward] in driving habits."

The gentleman has an interesting definition of "monumental." According to the rest of the article, we've cut our gas use by a less-than-staggering average of 3.3% during the last ten months, including a 5.6% drop in August.

Does something strike you as odd in this equation? A less than 6% drop in gas use in the last few months results in a nearly 50% drop in gas prices?

Excuse me if I'm a bit skeptical, especially when the main source quoted is, essentially, a Washington lobbyist working for the oil and gas industries.

Could there possibly be another factor at work here?

In less than six months, the price per barrel has dropped from a high of $140 to less than $60, so low that OPEC has already cut production once and is thinking of cutting it again. So... did that tiny drop in demand (sorry, but I am not...repeat, not... going to call a decrease of less than 6% "monumental") take us from oil being as scarce as roses in the desert to a situation where we're now swimming in in the stuff?

I don't think so. Despite the cries of "Drill, baby, drill!" we haven’t recently added a few dozen new offshore oil rigs. (These take seven to ten years to start producing.) No one has reported the discovery of massive new oil fields. Peace has not suddenly broken out among the oil-rich countries of the Middle East, nor has there been any scientific breakthroughs that will let us turn water into gas.

So why this huge drop?

Can you say “oil futures?”

The Star-Telegram also runs the work of an award-winning journalist called Ed Wallace. Wallace reports on the auto industry, but he talks about a lot more than the newest models and who’s making a profit this week. Read Wallace and you’ll often get a very interesting take on the whole U.S. economy.
Which I got back on May 19th, when I read a Wallace piece called “ICE, ICE, Baby.” In this article, Wallace reports that the zooming gas prices in the first part of this year were not the result of short supply, but were caused by the gutting of regulations designed to control not only speculation in the oil market, but also speculation in natural gas futures. Speculators were allowed to buy oil futures, often millions of barrels worth, then hold them while prices rose, thereby creating an artificial scarcity.

This, according to Wallace, is why prices increased, and it became evident in a Senate investigation as far back as 2006...but no one did anything about it.

How did it pass under the radar that both the Senate and the House studied the issue of price manipulation in our energy markets and both concluded that it was unregulated, massive trading in one futures market that was really driving up the price of oil and natural gas?

I suggest you read both this article and Wallace's follow-up, which we now know asked questions that should have been asked by a lot more than one reporter:

We started as a society that worships hard labor and the basic business ethic of building value into the goods you create. How’d we get from there to worshiping Wall Street’s billion-dollar boys — who create nothing, build nothing, own nothing and deliver no goods, and yet can throw so much money into products made by others that they determine what we consumers will pay for those goods?

When you read those articles, I think a lot of things involved with our current economic meltdown will begin to make sense…especially when you read Wallace’s comments about ICE, the Intercontinental Exchange. Basically, Wallace makes a pretty good case that prices throughout the energy market climbed because deregulation allowed speculators to go crazy buying and holding energy futures...and these speculators then fed misleading stories about "scarcity" to media outlets that accepted them with few questions asked.

Now all of Wall Street, including those who bought up huge blocks of oil futures, are scrambling for cash. Is it too much of a stretch to wonder if they are dumping those futures at fire-sale prices, and this, rather than a small drop in demand, is the reason for the astonishing plunge in gas prices?

If so, let’s hope that our incoming Congress and new president will re-impose sensible regulation. But even if this happens, it’ll take time, so don’t go back to your old wasteful driving habits. Fire sales are temporary...but greed is always with us

Enjoy $2 a gallon gas now….but don’t expect it to last. Let's hope that--with a little luck and a different attitude in Washington--while the cost of gas may soon begin to inch up as true supply-and-demand comes into play, we won't see anything near $4 for a long, long time.


Update: My thanks to the folks of the Money Hacks Carnival for including this post in their latest edition.

Is There a Financial Storm Coming?

Anyone who’s lived through a recession or two can recognize the storm clouds on the horizon. Things are happening in the world and in this country that could easily make a mess of our economy. If that happens, those with high levels of debt and little available cash could find themselves in real trouble.

What are the warning signs of possible financial meltdown?

• First, the amount of American debt, both private and governmental, has climbed to frightening levels.

• Second, the ongoing conflicts in the middle East will serve as a reason (or possibly an excuse?) for the price of oil to remain high.

• Third, the current combination of blistering temperatures and lack of rainfall have resulted in drought conditions throughout much of the American west and heartland. Add to that damage caused by flooding along the east coast earlier this year and the prospects for agricultural yields are down.

• Fourth, interest rates have been climbing slowly but steadily during the last year and are now just below 7%. When the Federal Reserve meets in early August, it’s likely rates will climb higher still.

What will be the effects of these conditions?

Let’s start with the extraordinary levels of debt in this country.

According to the Bureau of the Public Debt, the national debt is now more than $8.4 trillion.

Increases in government spending overall, the cost of the wars in Afghanistan and Iraq, coupled with multiple rounds of tax cuts, have resulted in this record national debt. To make things even more precarious, much of it is owed, not to American citizens, as was true in the past, but to countries such as Japan and China.

Meanwhile, consumers have gotten in the habit of using their credit cards for everything from gas to groceries to college tuitions, which, when coupled with long-term debt such as mortgages, have created consumer debt loads that the Federal Reserve has termed "near record levels." This habit of charge-now-pay-later works until you reach your spending limit. Suddenly your source of funds is gone, and if you’ve been relying on credit cards to pay for necessities, you’re in real financial trouble.

The same holds true for government. If our “bankers” overseas decide to stop buying Treasuring notes and securities, our government could be in danger of running seriously short of funds.

And—here’s a thought that may not have occurred to you—as taxpayers, we are responsible for paying back money that our government borrows. So all of this debt, public and consumer, is our debt. Both as consumers and taxpayers, Americans owe a frightening amount....and, with interest accumulating, it just keeps growing.

What about the price of oil?

High oil prices don’t just affect what you pay at the pump. They hike the cost of almost everything sold in this country. Shipping costs, energy prices, manufacturing costs, travel fares; they all go up. And all this is passed on, in one way or another, to the consumer.

Now add in a years’ worth of bad weather.

In north central Texas, where I live, hay used to cost $3 to $4 a bale. The price now, after a grim year of drought, ranges between $8 to $10 a bale for hay that has to be shipped in from as far away as California.

Meanwhile, in much of the West, dust has replaced grass. Ranchers are wondering how they’re going to feed their livestock through the winter. Many are selling off their herds, which may drive down meat prices now, but will hike them in the long run. Crop yields have dropped in many parts of the country.

Add to this the damage caused by earlier flooding along the east coast, and we have a situation that will almost certainly result in higher food prices for the foreseeable future.


What Was Down (Interest Rates) Can Go Up... And What's Gone Up (Home Prices) Can Also Come Down

Finally, we have the chance that such rising costs will spur inflation, causing the Federal Reserve to hike interest rates. This could seriously affect two of the driving forces of our economy, the home building and home buying industries. People who took on overlarge mortgages in the last few years, counting on appreciation to build equity, may find any increase in their home's value wiped out as higher interest rates shrink the pool of potential buyers. Those with variable rates may find their mortgage payments rising.

Add it up—huge, ever-increasing levels of debt, high oil prices, bad weather throughout the country and climbing interest rates. This is a recipe for increased costs of living across the board at the very least, and at the worst, a recession that could really hurt wage earners.

So...just in case.... start stashing cash. Use the tips you’ll find on this site and others to cut your expenses, then bank the savings. Start paying off your debts, especially any high interest-rate debt such as credit cards. If any of your debt features a variable rate, check how much your payments might increase if the rate goes up, so you can plan how to handle that. Even better, see if you can switch to a reasonably low fixed rate without going broke paying refinancing charges.

If the economy goes south, money in the bank and smaller debt payments can help assure your financial survival. If the sky doesn’t fall—if our nation’s finances stay healthy—you’ll still have improved your personal balance sheet...and that’s always a good idea!