Jim Hamilton Welcomes the Rising Price of Oil

He thinks oil at $100 a barrel is good news:

Econbrowser: $100 a barrel: Crude oil reached a record high on Tuesday, and there's an embarrassing oversupply of theories to explain why.... Venezuelan President Hugo Chavez' decision to cut off sales of crude, gasoline, and diesel to ExxonMobil... output from West Africa has been reduced by problems in Nigeria... speculation that OPEC will cut production quotas... Monday's explosion at the Big Spring refinery in Texas... speculation that Shiite cleric Muqtada al-Sadr may announce his intention to abandon his participation in the present Iraqi cease fire....

[W]hat of those who say, like Joe Friday, "all we want are the facts." Well, here are some. On the same day that crude oil gained 4.8% in price, gold was up 2.6% and copper shot up 5.8%.... [L]et me bring up one more fact that I believe may be quite pertinent. The expected fed funds rate implied by the April fed funds futures contract shot up 7-1/2 basis points Tuesday. Whereas traders last Friday were anticipating an average fed funds rate of 2.415% for April, Tuesday's closing price brings that up to 2.49%.

Now, if you really try, you can still fit that last little nugget into your inflation meme. Say, traders know that $100 oil will scare the Fed into worrying more about inflation so Bernanke will have to slow down lowering rates. Or something.

Or you could try a line that to me seems a bit more natural: incoming data aren't confirming the initial notion held by many that a recession began in December. If so, it means that the Fed's easing will come to an end within a few months, and that the demand for oil, copper, and most everything else is going to be stronger than many of us had been anticipating as of a few weeks earlier.

If so, $100/barrel might not be as bad news as you thought.

Comments

[ctate]

My burning question for the last six or so months is this: why, although the price of oil has been rising over this time from $75-ish to now flirting with $100, has the price of gasoline been essentially stable in the US over the same span of time?

[tjallen]

Looks like searching for the silver lining of a very dark cloud...

I've seen predictions of gas prices at $3.35 to 3.50 by mid-Spring.

[James Wimberley]

It's a strange sense of priorities to look at it this way. $100 oil is good news because it slows global warning and sends a strong market signal against energy gluttony: "Repent! The end of the world is nigh!" Pity about the people who get the rents though.

[zinc]

Jim Hamilton is a true believer in the futures market. During the past several years I have followed his blog, he has yet to entertain the concept that the futures markets are more akin to a price fixing mechanism than price discovery.

There have been a number of extraordinary price movements, natural gas, metals, oil, that suggest speculative money is a major determinant of price. During the 90's, a Sumitomo trader was convicted of fixing prices, for seven years, in the copper market.

Leveraged contracts are the currency of the futures markets. I have yet to see the futures as a reliable indicator of any concrete trend but one helluva indicator of excessive speculation in the economy. The IB's have been making their nut on "prorietary trading" for the past few years. That in itself makes my tin foil antenae buzz.

[Doctor Jay]

Say what you will about rents, but price will encourage more conservation than good will alone.

On the other hand, I think allowing some "excessive" inflation may be the best of a bunch of bad choices facing us. Would you rather see insolvent banks, and a government struggling to pay its debt? Well, if you hold a lot of paper, maybe you would. Though if you do, maybe you should think about shifting some assets around now. I hear stocks are cheap...

[Neal]

Increase in oil showing no recession coming?

Let me tell you a little story from my industry--steel fabrication.

Japan signed an agreement to buy iron ore at a price 69% above last years price. This will translate into a 13-18% increase in rolled steel products that go into autos, buildings, etc.

China has predicted that they will import 11% more steel this year and export 27% less steel. As they are the worlds largest producer, the net result is less steel for the for the remainder of the world, adding probably another 20% to the price of rolled steel products.

As reported in the Lloyds Shipping News, the cost of building a very large tanker has risen from $90M in 2004 to $150M today (67% increase).

But in the US we are entering a recession where residential, commercial, retail and industrial construction is coming to a halt (soon to be followed by public construction due to cah strapped cities and states). I see that directly in the quantity and type of jobs for bid now. I see it in the amount of CRE lending that is happening now. I see it in declining sales of cars and durable goods. This is just the beginning of a long down-hill ride. Yet prices for steel are set to rise 30+% in the next month or so, but we are definitely heading into a fall.

So, the lesson for Mr. Hamilton--the price of world commodities has far less to do with the health of the US economy than before. And, the price of world commodities go up when the dollar goes down.

Good news? HA!

[derrida derider]

Neal is right. Americans should prepare for serious stagflation, consequent on a severe decline in the terms of trade.

The only way the Fed has left to avoid a prolonged recession is a prolonged debauch of the currency. Which means bye-bye to the greenback's reserve currency status, and bye bye to cheap money for a long long time.

[piotr]

I would like to joint the comment about the surprisingly low gasoline prices. The refining mark-ups seem to be negative now, and the question is why.

I was thinking about political manipulation, but by now the fate of GOP as the ruling party seems to be a done deal, and fighting that with billions of dollars would be ineffective. So explanations should be market-based rather than conspiratorial.

One question is: why refineries do not go bankrupt? Well, they belong to oil producers who manifestly are doing well. Downstream looses money, upstream makes a killing.

Yet, why shouldn't refiners ask for at least normal return on their capital? Possibly there is a glut of refining capacity, which is possible if American, at long last, decreased gasoline consumptions. I will try to google about it. But yes, this is a very healthy phenomenon.

In the meantime, Atlantic has a story about huge swing in home buying preferences from "exurb" to "walkable living" like city centers, inner suburbs etc., to the point that some exurbs are becoming upscale versions of trailer parks.

[Colleen W]

We have been at $3.73 to $3.75 for at least a month now.
I do believe that it gets worse before it will get better. Everything is affected from jobs, food delivery, food prices. Pizza delivery drivers do not come out ahead, the gas allowance versus what they actually pay for gas, not even close!